The Texas Railroad Stock and Bond Law AN ADDRESS BEING A PLEA FOR A CHANCE IN BEHALF OF TEXAS RAILROAD MEN BY R. C. DUFF, OF HOUSTON, TEXAS DELIVERED AT AUSTIN, TEXAS, FEBRUARY 10, 1911 Before the Committee on Common Carriers of the House of Representatives of the Thirty-second Legis¬ lature, the Committee having under consideration House Bill No. 303, by Rowell, proposing to amend the Stock and Bond Law (1) so as to authorize the re¬ valuation by the Texas Railroad Commission, of Texas Railroads, for stock and bond purposes, at the expense of such Railroads, and not oftener than once in five years, and (2) so as to harmonize such valuation to the valuation fixed by the State Tax Board for the purposes of Taxation. To the Honorable the Committee on Common Carriers of the House of Representatives of the Thirty-Second Legisla¬ ture of the State of Texas : This argument, submitted in support of House Bill No. 303, proposing amendments to our railroad stock and bond law, is a prayer, a deep, sincere and fervent prayer, that this legisla¬ ture will by the adoption of these proposed amendments take a step toward reopening the door of Opportunity, in respect of independent railroad enterprises in Texas, in favor of citizen? of this, our own State. For a number of years the rigors of our Texas Statutes have been too severe for new men, young men with ideas and ambi¬ tions larger than their means, to make much headway in thr railroad field in Texas. Yet it is such men who build new rail roads. Similarly, the burdens of our legislation have been toe heavy for the smaller railroads to bear, and one by one they an giving up the struggle, their owners only too glad to sell out tc the larger systems at prices frequently representing heaw losses. The tendency for years has been and is toward thi extinction of the small and independent lines, leaving the rail road field occupied only by the great systems. The latter havi been able to stand the strain, first, because of their greater siz and strength, and second, and more especially, because they ar owned by outside system lines enjoying a credit sufficient t< enable them to command some money to protect their Texa investments. THE PRESENT SITUATION IN TEXAS. On June 30, 1909 (the latest date for which accurate figure are available), the railroad mileage of the State, omitting rail road terminal companies, was divided between outside syster and independent companies, substantially as follows. 2 SYSTEM LINES. Abilene & Northern Ry. Co. (Col. & Sou. System) . 38.70 Beaumont, Sour Lake & Western Ry. Co. (Frisco) . 82.79 Cane Belt Railroad (Santa Fe). 107.84 Chicago, Rock Island & Gulf Ry. (C. R. I. & P.). . 438.99 Dallas, Cleburne & Southwestern (M. K. & T.).. .. 9.82 Denison, Bonham & New Orleans (M. K. & T.). . . 24.17 Denison, Pacific & Suburban Ry. (T. & P.). 7.63 Eastern Texas Railroad Co. (S. L. S. W.). 30.30 El Paso & Northeastern Ry. (E. P. & S. W. System) 19.32 El Paso & Southwestern Ry. Co. of Texas (E. P. & S. W. System) .. 4.69 Fort Worth & Denver City (Colorado & Southern) . 454.14 Fort Worth & Rio Grande Ry. Co. (Frisco). 1 83.39 Galveston, Harrisburg & San Antonio Ry. Co. (Sou. F^ac.) . 1,332.01 Galveston, Houston & Henderson R. R. (M. K. & T. and Gould Systems) . 46.49 Gulf & Interstate Ry. Co. of Texas (Santa Fe).... 70.88 Gulf, Beaumont & Great Northern (Santa Fe). 77-78 Gulf, Beaumont & Kansas City (Santa Fe). 62.62 Gulf, Colorado & Santa Fe Ry. (A. T. & S. F.). . . . 1,049.67 Houston East & West Texas Ry. (Southern Pacific) 190.94 Houston & Texas Central R. R. (Southern Pacific) 789.01 International & Great Northern R. R. (Gould System) . 1,106.00 Jasper & Eastern (Santa Fe). 17.50 Kansas City, Mexico & Orient (K. C. M. & O. System) . 160.30 Marshall & East Texas Ry. (Union Trust Co. of St. Louis) . 72.55 Missouri, Kansas & Texas Ry. Co. of Texas (M. K. & T. System) . 1,121.72 Orange & Northwestern Ry. Co. (Frisco). 61.55 Paris & Great Northern R. R. Co. (Frisco). 16.94 ^Pecos & Northern Texas Ry. Co. (Santa Fe). 151.82 Pecos River R. R. Co. (Santa Fe). 54- 2 7 3 * ar Rio Gfande R. R. (Frisco) . 22.50 Rio Grande & El Paso (Santa Fe). 20.17 St. Louis, Brownsville & Mexico (Frisco). 411.19 St. Louis & San Francisco Ry. Co. of Texas (Frisco System) . 85.63 St. Louis Southwestern Ry. (Gould System). 695.21 San Antonio & Aransas Pass Ry. (W. H. McIntyre, New York) . 723.80 Southern Kansas Ry. Co. of Texas (Santa Fe) .... 125.07 Texarkana & Fort Smith Ry. Co. (K. C. S. System) 81.10 Texas & Gulf Ry. (Santa Fe). 73-55 Texas & New Orleans R. R. Co. (Southern Pacific) . 452.31 Texas & Pacific Ry. Co. (Gould System). 1,038.16 Texas-Mexican Ry. (National Lines of Mexico). . . 161.84 Trinity & Brazos Valley Ry. (C. & S. and Rock Island) . 302.82 Weatherford, Mineral Wells & Northwestern Ry. (Gould System) . 41.20 Wichita Falls & Oklahoma (Colorado Southern). 22.80 Wichita Valley Ry. Co. (C. & S.). 52.20 Wichita Valley R. R. Co. (C. & S.). 60.70 Total . 12,164.08 Being 93.2 per cent, of the entire mileage. INDEPENDENT LINES. Abilene & Southern Ry. Co. (Morgan Jones and < Associates) . 27.41 Asherton & Gulf Ry. Co. (Asher Richardson and Associates) . 11.70 Beaumont & Great Northern R. R. (Wm. Carlisle). 33-45 Burr’s Ferry, Browndel & Chester Ry. Co. (John H. Kirby) . 11.12 Caro Northern Ry. Co. (John G. Saner and Asso¬ ciates) . 16.62 Groveton, Lufkin & Northern Ry. (Trinity County Lb. Co.) . 21.15 4 Hearne & Brazos Val]ey (G. C. Tegethoff, New York) . 19.74 Houston & Brazos Valley (Felix Jackson). 20.00 Livingston & Southeastern Ry. Co. (Knox Lumber Co.) . 7.20 Moscow, Camden & San Augustine Ry. (W. T. Carter) . 7.00 Nacogdoches & Southeastern R. R. (Frost-Johnson Lbr. Co.) . 13.19 Quanah, Acme & Pacific R. R. (Sam Lazarus of St. Louis and Associates). 2.25 Rio Grande & Eagle Pass Ry. 28.10 Roscoe, Snyder & Pacific Ry. (E. S. Hughes and Associates) . 31.12 Shreveport, Houston & Gulf R. R. (L. V. Garrison and Associates). 9.00 Southwestern Railroad Company. 19.50 Stephenville North & South Texas Ry. Co. 44.38 Sugarland Railroad Company. 14.20 Texas, Arkansas & Louisiana Railway. 7.70 Texas Central R. R. Co. (H. K. McHarg and others, New York) . 268.00 Texas Midland R. R. (E. H. R. Green, New York). 111.18 Texas Short Line Railway Company. 9.36 Texas Southeastern R. R. Co. (T. L. L. Temple and Associates) . 21.65 Texas State Railroad . 24.00 Timpson & Henderson Railway. 8.00 Trinity Valley & Northern Ry. (Dayton Lbr. Co.) . 10.00 Trinity Valley Southern R. R. (T. S. Foster and Associates . 6.00 Wichita Falls & Northwestern Ry. (Kell & Kemp) 17.10 Wichita Falls & Southern Ry. Co. (Kell & Kemp). 52.36 Wichita Falls Railway Co. (Kell & Kemp). 17.96 Total . 890.44 Being only 6.8 per cent, of the entire mileage. 5 Since the date of above lists the owners of the following independent lines have given up the struggle, and have sold out their properties to system lines: Miles. 1. The Texas Central Railroad to the M. K. & T.. . 268.00 2. The Stephenville North & South Texas Ry. to St. Louis Southwestern . 44.38 312.38 It would be interesting to compile, but it is now difficult to recall the long list of independent lines, the projectors of which in days gone by set out with splendid plans and high hopes, each project having one or more central figures who prob¬ ably could see no reason why they in Texas might not duplicate the mighty achievements of such great builders as Mr. James J. Hill and General Grenville M. Dodge (men who in youth and poverty conceived vast railroad plans, found the money to finance them and themselves carried them to magnificent fruition, in territory ‘ar less favorable than Texas) only to find, after building .enty, fifty or possibly an hundred miles of track, and exhai Mng the personal funds of themselves and associates, and efforts to enlist new capital necessary, that the doors of every money market in the world were closed against them; then amidst the stress and strain of operating accord¬ ing to our expensive laws new and half-born projects, saw hope fade, and were only too' glad if, as was not always the case they could escape absolute financial wreck by turning over their properties at some price to the nearest system in their section. In my own day and under my own observation, the follow¬ ing promising projects have passed out of the hands of the men who in whole or part originated them into the hands of the larger systems: 1. The Gulf, Beaumont & Kansas City Ry. Co. and the Gulf, Beaumont & Great Northern R. R. Co., John Henry Kirby, to the Santa Fe. 6 2. The Cane Belt Railway, Dunovant & Elclridge and Jon¬ athan Lane, to the Santa Fe. 3. The Orange & Northeastern R. R. Co., L. Miller and W. H. Stark and associates, to the Frisco. 4. The Beaumont, Sour Lake & Western Ry. Co., Wm. Weiss and others, to the Frisco. 5. The Trinity & Brazos Valley Ry. Co., R. H. Baker and others, to the Rock Island and Colorado & Southern. 6. The Gulf & Interstate R. R. Co., L. P. Featherstone and others, to the Santa Fe. 7. Stephenville North & South Texas R. R. Co., to the St. Louis Southwestern. 8. The Texas Central R. R. Co., H. K. McHarg and others, to the M. K. & T. 9. The Galveston, La Porte & Houston Ry., Judge T W. Ford, J. Waldo, M. T. Jones and others, to the Southern Pacific. 10. The old Georgetown and Granger Railroad, known as the Link Line, promoted by Emzy Taylor, which, as I re¬ call, after Mr. Taylor’s death, was taken over by the M. K. & T. 11. The Houston Belt & Magnolia Park Railroad at Hous¬ ton, foreclosed on by creditors and purchased by the I. & G. N. 12. Texas Trunk Railroad, which after a receivership, passed into the hands of the Southern Pacific. Possibly one or more of these transactions signified a meas¬ ure of success. In most instances they represented the last act in pitiable dramas where heavy financial loss occurred to the original promoters, and in some cases suicide and death followed in the train of financial disaster. The path of promotions of railroads by individuals in Texas during the past 18 years has been strewn with wrecks, receiver¬ ships and trouble. THE HEART OF THE TROUBLE. If the inside facts were available, it would be found that while not the sole trouble, the heart of the trouble of all of the independent lines has been and is our Texas Stock and Bond law. Texas, out of all the States of the American Union, and out of all the countries on earth, is the only State that ever passed a law having the characteristics of that law, and al¬ though it has been in operation and under the observation of the country since April 8, 1893, a period of eighteen years, not a single other State, not even Oklahoma, many of which have copied our other railroad statutes, has ever deemed it wise to adopt it. The reason is that the whole law was based on mistakes con¬ cerning the law and concerning facts. A law so predicated could not fail to wreak injustice and disaster to the concerns against which it was directed. THE MISTAKE CONCERNING LAW. The mistake concerning law, was the erroneous opinion held by Governor Hogg and probably by all who favored the pass¬ age of the law in 1893, that the United States Supreme Court had held or would hold that there was an intimate relation¬ ship between the amounts of stock and bonds outstanding against railroads, and the rates charged and to be charged against traffic for transportation, viz.: that rates fixed by our railroad commission must suffice to enable railroads out of their net earnings, to pay interest on whatever amount of bonds might be outstanding and dividends on whatever amount of stock might be issued. There may have been some ground for such an opinion at the time of the enactment of the law. There is absolutely no ground for such an opinion at this time. The question has been absolutely settled by the Supreme Court, and it is the reasonable value of the property of railroads de¬ voted to the transportation service, fairly ascertained, which it 8 takes as the factor on which to figure the right to a reasonable return, and if there be a discrepancy either way as between the reasonable value of railroad property and the amount of stock and bonds, the latter becomes an absolutely negligible factor, of positively no moment, in the determination of rate cases. I attach hereto an appendix, listing decisions by the United States Supreme Court, beginning with Smyth vs. Ames, 169 U. S., 466, followed by decisions of the United States Circuit Courts of Appeals and District Courts and by the Supreme Courts of various states, all confirming, following and en¬ forcing the doctrine last stated. And I should add that according to these same decisions, where rates for the transportation of freight or passengers have been or may be attacked by the Texas railroads, as being unreasonably low, the low valuations of our railroads by our commission or the small amount of stocks and bonds outstand¬ ing, have not been and will not be factors of any moment for the maintenance of such rates. The courts will look to the present reasonable value of the property devoted to the trans¬ portation service; nor do they hold to the cost of original con¬ struction ; they look to present reasonable value; such being the case, if the railroads find themselves hampered in financing their necessities by the present limitations of our stock and bond law, it is gratuitous bad policy to further maintain such restrictions; the railroads are harmed or hampered without any corresponding advantage, gain or saving to the State or to any shipper in the State. Personally, I have attended for several years most of the important hearings held by the Railroad Commission of this State, having reference to proposed reductions of both freight and passenger rates, and there was never an occasion according to my observation that the Commission, in respect of their action, remotely considered either the amount of stocks and bonds outstanding or even the values of the railroads the reduction 9 of whose rates was under consideration. If any point was made concerning either factor, it was purely academic and un- influential. If the amount of stock and bonds outstanding en¬ titled the holders to demand rates to pay interest and dividends on same, assuming six per cent, to be a fair return on the stock (as has been held by a Federal Circuit Court of Ap¬ peals, in respect of the fair return on the value of the railroad property), there was never an hour since the establishment of the Commission when it could have reduced rates, because the net income of the Texas railroads, considering them as a whole, after deducting for taxes, has never at any time sufficed to pay interest and such dividends. And yet in that time the Commission has made and main¬ tained hundreds of rate reductions. The theory mentioned was never influential with our railroad commission in rate making. There is, therefore, no influential relationship between the amount of stock and bonds issued by railroads and the rates which by law they are authorized to charge for the transporta¬ tion of freight and passengers; and in so far as that considera¬ tion entered into the enactment of our stock and bond law, or now enters into its further maintenance on our statute books, the reason for the law has failed. THE MISTAKE CONCERNING FACTS. A profound error indulged by those who were responsible for the enactment of the stock and bond law was that its im¬ mediate effect would be to place Texas securities on a high plane, render them much sought after, and thereby make easy the promotion of new railroad ventures. I know this was Governor Hogg’s opinion. There were not wanting men at¬ tempting operations in the railroad field reposing confidence in his views, and immediately following the expiration of his second term in office, he was employed by Emzy Taylor and associates, who were then promoting the Link Line, to nego- 10 tiate the sale of bonds to be issued by them under the then new stock and bond law. I was quite a young man at that time, but enjoyed the personal friendship of Governor Hogg, and I sat by his side one night down here in the lobby of the Driskill Hotel, and heard him discuss his expectations concern¬ ing the flotation of these securities. He was then preparing for a trip to New York, and he spoke with utmost confidence of the favorable consideration he felt people with money, habituated to purchasing railroad securities the amount or which was controlled only by the will or judgment of the pro¬ moters, must extend to lines of securities put out under the Texas stock and bond law. He was confident that he would be able to place the Link Line bonds to realize well above par. It would seem that there can be no question of the sincerity of himself nor of the Link Line people in this view, for, first of all the many who have since attempted it, they put the proposi¬ tion to the test, Mr. Taylor and associates, I understand, in¬ volved themselves to the extent of their means, heavily in the undertaking, and Governor Hogg went out into the moneyed world, where all of us must go, to interest new capital in the Link Line project. He suffered the same experience that most of us have since usually suffered when dealing with a Texas railroad not built, but only proposed. He could not sell a single bond. After months of effort, he gave it up and re¬ turned to Texas. Soon after Mr. Taylor’s bank suspended, and he took his own life. There was then and there is today practically no market for Texas railroad securities . Take today the list of securities traded in every day at the greatest market in this country, New York. There more buy¬ ers and more sellers meet than elsewhere throughout this en¬ tire country, and the brokerage firms, thousands of them, are keen to handle every security, note or commercial obligation that any of their hundreds of thousands of investing customers throughout the world signify the slightest desire to purchase. Take the transactions of any day, any month or any year. You ll will not find the record of a sale per month of any Texas rail¬ road security. And yet there are locked up in the vaults of that city, hundreds of millions of dollars, par value, of Texas railroad securities, taken over in mass by the old systems, and being used by them, as far as they can so utilize them, as col¬ lateral. If there were only a slight demand from the investing public for Texas bonds, a mass of them would come forth in an hour for sale to the public. Their owners would be glad to sell. It is the necessity to carry such huge loads of undi¬ gested Texas securities that makes the Southwestern systems financially weak. Suppose your committee in the aggregate were worth ten million dollars and bought a million of stock and nine millions of bonds in securities of a railroad. Suppose you then offered your bonds to the public and found absolutely no purchasers. Suppose then necessities were daily arising to build more side tracks, ballast the line, build new depots, in¬ crease terminal facilities, buy new equipment, etc. If, as most likely would be the case, you could not under our stock and bond law, issue more bonds to cover these necessary expendi¬ tures, and few railroads anywhere earn enough to take care of them, what would you do ? And even if you could issue more bonds and could not sell them, what would you do? You would do just what all of the Southwestern systems are now doing: (i) Cut down the improvements to the absolute minimum, and (2) for such improvements as must be made, put out your notes at bank at the best rate of interest obtain¬ able and “hock” your bonds as security. But this is absolutely the most expensive form that financing can take, and railroads whose money necessities must be cared for in that way, necessarily occupy a weak position financially. It accounts for many things in connection with our Texas lines frequently misunderstood by the public, and even by our rail¬ road commissioners, which are sometimes attributed by them to supposed indifference on the part of the system lines to the interests of or indisposition to protect their Texas properties. These facts are bitterest to those of us, your fellow citizens, 12 who have chosen for their life-efforts the railroad field. We look around us and see from boundary to boundary of our grand native State, landscapes reflecting the smiles of God Himself; a soil the most fertile; resources the most diverse, and the possibilities of future development from new transportation projects absolutely unparalleled elsewhere on this continent. But a man from Mexico, or Arkansas, or the Dakotas, with a railroad scheme, can sell his bonds anywhere, in America or Europe, ten for one, quicker than the man from Texas. Why, Texans themselves will not buy the stock or bonds of Texas railroads nor even lend them money. If you want to see a Texas banker or any individual with money to lend shudder, offer him the stock or the bonds or the notes of a Texas rail¬ road. They probably have never analyzed, as I am doing, the trouble underlying these securities, but the experience of others has been enough for them, and they know that if they come to own these securities they cannot effect resales of them. There is ample money on deposit and for loan in Texas itself to dupli¬ cate a large part of our entire railroad mileage. But I assure you that aside from the inadequate resources of those who themselves are promoting that line of work not enough to build ten miles is available, if the security offered be the railroad itself. Certainly, some railroad mileage has been built in Texas since 1893. At the close of the fiscal year 1892, there were 8,977 miles of railroad in Texas. On June 30, 1909, the mile¬ age had grown to 13,110 miles, an increase in 17 years of 4,133 miles, or 46 per cent.; or at the rate of 243 miles or 2.7 per cent, per annum. But this was truly a bad showing. Texas has 262,290 square miles of territory, and during that whole period we built only one mile of railroad track per annum for each 1,080 square miles, or 691,200 square acres, of territory. How did this compare with the State’s development along industrial lines, representing all other departments of human activity? The amount of freight shipped in 1892 compared with the amount of freight shipped in 1909 is an excellent illus¬ tration, and the figures are as follows: 13 Number of tons carried of freight earning revenue for year ending June 30, 1892.12,742,656 Number of tons carried of freight earning revenue for year ending June 30, 1909.42,061,619 Gross increase: 29,318,963 tons or 230 per cent, for the whole period, and 13.5 per cent, on an average, for each year of that period. In 1892 one ton of freight was shipped for each thirteen acres of land in Texas; in 1909 a ton of freight was shipped for each four acres. In short, freight shipments during that period, grew almost exactly five times as fast as the railroads did. But, you may inquire, in view of the adverse effect of the stock and bond law, how has any railroad at all been built in Texas since 1893 ? Disagreeable as it always is, both to one’s self and those who listen, but in the hope it may serve to better illustrate this argument, I am going to give you a story out of my own ex¬ perience in railroading: In 1903 and 1904 a party of wealthy gentlemen at Beaumont and Port Arthur, joined with other gentlemen from Columbus, Ohio, and by subscribing to shares of approximately $20,000 each, built and equipped a line of railroad from Beaumont, Texas, to Sour Lake, in an adjoining county. The territory was fertile and business active. But railroading is the only business in Texas where a quarter of a million dollars, no mat¬ ter how well invested and managed, cannot be made to pay even operating expenses. The builders became disgusted, and I contracted with them for the stock and bonds on a basis much below the amount they had invested. I then projected an extension of the line to Houston. The territory to be inter¬ sected was the oil, lumber and rice section, the heaviest and most constant tonnage producing part of Texas. The termini at Houston and Beaumont, were fine cities, 89 miles apart. Estimates on the cost of construction were compiled, and I found a million and a half of dollars additional to the original investment would be required. I approached many moneyed 14 men in Texas with my plans (and in Beaumont in that day were men willing to put up money even to bore for oil in the Gulf of Mexico), but not one dollar of capital could I find for the project in Texas. I then went out into other states and cities and submitted the underwriting to people accustomed to embark on such enterprises. Universally it was conceded to be a proposition combining every feature that renders a railroad project attractive, a strong local traffic in the territory affected, with powerful connections to furnish through business at each terminus, and a level country to build through, with light grades, and involving a minimum expenditure for con¬ struction. I showed these people the sworn deposition of one of the greatest railroad men in the world that he himself was contemplating building just that line, and they themselves had one of their number wait on the Texas head of another system who did not hesitate to say that if the line was built, he would urge his principals to buy it. My new found friends were con¬ vinced, and we began to figure out a contract whereby they would buy the railroad’s securities. This brought us up against the Texas stock and bond law. They wanted to know at what amount per mile we proposed to bond the new line and at what figure we would sell them such bonds. I was obliged to say that no man could say in advance of construction at what fig¬ ure a Texas railroad could be bonded, and that as the law re¬ quired that the aggregate of stock and bonds should in no case exceed the commission’s^ valuation, they would have to figure on paying par for the bonds. But, they explained, they them¬ selves could not carry in their own hands all the bonds that they bought; they were distributors of such securities, and un¬ less there was some margin of profit, there was nothing in the trade for them. Moreover, they pointed me to the daily price lists of American railroad securities where both the stock and bonds of railroads already perfectly successful, never failing to pay in¬ terest, could be had at prices less than par, and asked me how I could expect to sell them at par unissued securities indefinite as to amount, on an unborn railroad which it would undoubt¬ edly take five years (and five years is a minimum period) to 15 put on an interest paying basis, when all the world of attractive investments was open to them elsewhere for placing money without such restrictions. On this rock we foundered. Take the proposition home to yourselves in every day life: Suppose you wanted to build a cotton gin, possibly in a coun¬ try where as yet no farmer had come to raise cotton; suppose the law imposed on you the duty to run your gin every day whether there was cotton to gin or not; suppose you went to a bank to borrow money in aid of your project, the security for your loan to be the plant itself. Suppose the bank consented to make the loan, but when you came to draw the note and mortgage you were compelled to say: “No; I can’t give you a note and mortgage now; you let me have the money now, and I will build the gin, and after it is built, three commis¬ sioners will appraise the value of the gin, and after they have done so probably two or three or more years from now. T will then give you a note and mortgage up to the amount of their appraisement, payable thirty years after date, to bear not ex¬ ceeding six per cent, interest, you to begin collecting interest when the gin begins to earn enough money over operating ex- pnses, to pay such interest”. Do you think the banker would likely make the loan at par or at all under such circumstances ? This exactly illustrates the case of the independent railroad man in Texas. But, it may be urged that the law authorizes promoters of railroads, after locating their line, to file plans and specifica¬ tions and estimates of cost for the proposed work with the rail¬ road commission, and to obtain from the commission in ad¬ vance a statement of their valuation on such railroad to apply after it is constructed. My reply is that this provision of the law, which is rarely resorted to, is of no practical value. I am under the impression that this method was pursued by Gov¬ ernor Hogg for the Link Line. I do not believe that any man can prognosticate in advance, within safe limits, the actual cost of building any considerable piece of railroad. Almost univer- 16 sal experience is to the contrary. Unseasonable weather dur¬ ing the construction period alone will upset the best calcula¬ tions. On the construction I have referred to, from Sour Lake to Houston, the crews of two work trains brought them into collision head on, the trains were wrecked, two men were killed, others injured. It added to the cost of construction probably thirty thousand dollars for damages and expenses. On an¬ other occasion false work over the San Jacinto river gave way beneath a work train, and the train and a part of the crew went down. This accident also added probably twenty-five thousand dollars to the cost of construction. Three times we built a bridge across the treacherous Trinity river, and twice it was swept away before completion by floods. But the commis sion only figures on and allows bonds for one bridge. I am told that the actual cost of construction of this railroad far ex¬ ceeded the commission’s final valuation. So, you will observe that bond people figuring to buy bonds limited by previous de¬ cree of the commission, to build a railroad, the same to be the sole security for the bonds, and, once embarked on the project, absolutely bound to continue producing money to protect their investment until the project is consummated, clearly discern that a previous valuation by the commission is no guarantee that the issue of securities will even cover the cost of the fin¬ ished work, and the subsequent valuation by the commission according to the present law, does not ordinarily extend to cover casualties of the sort above mentioned. Yet such things are common to railroad construction, and must be anticipated by railroad builders, whether anticipated by the law or not. But I did build the line mentioned from Sour Lake to Hous¬ ton. But how? As an employee. I wanted to build it, own it, extend it and keep it, and make it the nucleus of a larger line. If I had been operating anywhere in the world but Texas, I would have done it. But when I could not myself raise money on the project’s intrinsic merits, nothing remained for me to do but sell the railroad we had already built out of our own pockets to an ex- 17 isting system, which I did within thirty days thereafter, of such obvious merit was the propect. Then I was employed to carry out my own plans. But how was the money provided? By absolutely the only means that any considerable money has been raised for Texas railroad construction since the passage of the Texas stock and bond law: The system of railroad to which I sold, not being subject to the laws of Texas, simply sold its own securities, after the regular business-like manner followed everywhere in the world but in Texas, put the money- in the bank, and sent it down as it was needed to build the rail¬ road. Up to the last time I had heard of the matter, they had not yet even issued the stock and bonds of the Texas corpora¬ tion. They were of no direct consequence, and when issued, will never go on the market, but will be deposited in the vaults of some trust company, as far as they will go, as collateral for the loan, which was made, not against them, but in fact on the credit of the main parent company. And this is the process by which it has been possible for the old system lines to take care of about 200 miles of track con¬ struction per annum in Texas since the passage of the stock and bond law; and this is the means also by which they finance the purchase of our little independent lines when we grow weary of our struggles and being unable to sell our securities to investors, at last gladly let go for whatever we can get from our big brethren. And yet, it is the policy of Texas to encourage independent enterprise, and strong objection is urged in some quarters against the ownership of Texas railroads by outside railroad companies. No other condition can or will ever exist so long as our stock and bond law remains unamended, and if ever a ban be put on the ownership of Texas railroads by outside systems, not only will all growth of the big lines stop, but when our small lines get ready to give up the ghost, instead of selling out to the nearest system for some price, they will go into the hands of receivers and stay there. 18 I want to furnish another illustration, and regret that I must again refer to my own experiences, to illustrate why and how it is that the stock and bond law is putting all independent mileage in Texas out of the hands of independent owners and into the ownership of the big systems: A couple of years or more ago, I conceived an ambition to put together a line of railroad from New Mexico, running diagonally across the State of Texas, to deep water on the Gulf at Beaumont, Port Arthur or Sabine Pass. On looking over the situation, I found two existing railroads which were in line for the project, the Beaumont & Great Northern, running from Livingston, in Polk county, to Trinity, in Trinity county, and the Texas Central, running from Waco out to Rotan, in the Panhandle. Associating J. M. West, of Houston, we bought the Beaumont & Great Northern; we then went after the Texas Central. That line was valued by the railroad commis¬ sion for stock and bond purposes in 1894, at $13,323.50 per mile. Since that time it had been extended and bettered, and in my opinion was one of the most perfect pieces of railroad physically, in the State of Texas. It had extended its line, and the later valuations on these extensions brought into the aver¬ age, plus the commission’s allowance for subsequent better¬ ments and considerable new equipment, including owned sleep¬ ing cars, had brought the commission’s valuation for stock and bond purposes, up to $5,202,668, or $19,412 per mile. In my opinion, it was reasonably worth $25,000 per mile, at which the owners had for years held it. After protracted negotiations, Mr. West and myself acquired an option on all of the stock, and set out to finance the purchase, leaving to a later date the financing of the construction of the gaps between Waco and Trinity and Livingston and Beaumont, and the extension northwest from Rotan. It was the most attractive railroad proposition on the map of the whole Southwest. But again we met the stock and bond law. The Texas Central purchase simply could not be financed by issuing se¬ curities up to the commission’s valuation. The line was worth 19 a million dollars over their valuation. But no securities to rep¬ resent that margin could be issued. We therefore simply re¬ sold, and of course it was taken over by an old system line. Now how was its purchase financed by the system line? Consistently with the only possible practice, as I have hereto¬ fore described it: By putting out its own short time notes, de¬ positing the stock purchased as collateral, and producing ouc of its other assets additional collateral to cover the margin. We then sold our east Texas line, and dropped our plans. It is my understanding that those who purchased from us set out to carry them out, in whole or in part. The Texas Central financing was on short time paper; they set about sub¬ stituting bonds in lieu of most of the stock purchase, and to make a new mortgage to cover same, and additional bonds to provide for the extensions. In the midst of the transac¬ tion, our legislature passed the law giving preference to unse¬ cured claims over mortgage liens, (commonly referred to as the I. & G. N. claim bill). The effect on Texas bonds was disastrous and they are not now very good even as col¬ lateral. It is probably extremely fortunate for the M., K. & T. main system that its credit is strong enough to enable it to absorb into its general financing the notes it gave to buy the Texas Central. It is also extremely fortunate for me that I did not succeed in placing a similar line of notes. I could not have survived so terrific a blow at my underlying collateral. I would have been ruined. Experience has thoroughly convinced me that the idea that the stock and bond law, “squeezing the water” out of Texas stocks and bonds, would render them' sought after, is a fallacy. It not only squeezes the water out, but it also squeezes all chance for profit out of, and the practical certainty of loss into, our stocks and bonds. If you take out of a business all hope of profit for promoters, promoters will abandon that business, and only those already in the business will extend their in¬ vestments. 20 If you say to new investors that they must expect to put up par value or probably more than par, now, in order to get sev¬ eral years from now the stock and bonds of a railroad at pres¬ ent unbuilt, proposed to be constructed in an undeveloped sec¬ tion of Texas, when at the same time those same investors are daily receiving offerings of the securities of existing success¬ ful systems quoting such securities frequently below par, what chance is there to interest such investors in the Texas proposi¬ tion? This is exactly our attitude under our stock and bond law. The bill you have under consideration if passed will help us very greatly. It will not remove all of our difficulties, but it will remove some of them. It will authorize the commission, in valuing railroads for stock and bond purposes, to consider the same elements of value that make a live, ambitious human being of greater value in the world than the cold corpse com¬ posed of the same material, but dead. Physical valuation as now practiced under our law, for stock and bond purposes re¬ gards only the corpse of a railroad; the law so providing was passed in 1893, under a mistake and does not tit existing con ¬ ditions. The State has changed its policy and for the purpose of taxation, now regards the values of the living, going con¬ cerns. The idea which underlay the enactment of our stock and bond law, was antagonism to the evils of over-capitalization. Over-capitalization is an evil; but the law went to the opposite extreme, and like all too radical remedies, has created, as I have heretofore described, an equally pernicious evil by pre¬ venting railroads from capitalizing up to their necessary re¬ quirements. On June 30, 1909, there were 12,847.12 miles of main track in Texas. The amounts reported to the railroad commission by the railroads from time to time in reports sworn to by their ac¬ countants as the total cost of construction and equipment, down 21 to June 30, 1909, aggregated $515,211,981, or an average of $40,100 per mile. The aggregate amount of the values placed on those same lines by the railroad commission for stock and bond purposes, was $212,794,536, or $16,560 per mile. At the same time for the same year the values at which all of these same lines appeared on the State and County tax rolls was $326,684,008, or $25,425 per mile. These figures are taken from Table No. 13 of Appendix 1, to the 1909 report of the railroad commission. The following is a table of some of the most striking dis¬ crepancies between the values fixed by the railroad commis¬ sion for stock and bond purposes and those fixed by the State tax commission in connection with the tax assessors of the sev¬ eral counties, for 1909, for the purposes of taxation: Fort Worth & Denver City. $ 5,771,582 $ 15,604,139 $ 9,832,557 Galveston, Harrisburg & San Antonio . . 20,776,779 46,474,731 25,697,252 Galveston, Houston & Henderson 1,527,023 2,458,945 931,922 Gulf Colorado & Santa Fe. 17,936,030 30,379,259 12,443,229 Gulf Beaumont & Kansas City.... 676,484 1,672,479 995,995 Cana Belt . 830,967 2,361,316 1,530,349 Houston, East & West Texas. . 2,042,692 4,675,673 2,632,981 Houston & Texas Central . 13,683,834 25,165,808 11,481,974 International & Great Northern.. 20,986,997 28,724,077 7,737,080 Missouri, Kans. & Tex. of Texas 17,594,779 34,768,253 17,173,474 Pecos & Northern Texas . . 1,486,506 2,408,887 922,381 St. Louis Southwestern of Tex... . 10,350,186 11,683,076 1,332,890 San Antonio & Aransas Pass. 9,017,423 16,352,238 7,334,815 Texarkana & Ft. Smith (in Tex.) 1,603,788 3,136,266 1,532,478 Texas & New Orleans. . 8,913,425 15,990,065 7,076,640 Texas & Pacific in Texas. . 17,730,689 38,493,092 20,362,403 Texas Central . 3,698,452 4,102,459 404,007 Wichita Valley . 486,768 1,366,196 879,428 $155,114,404 $285,416,959 $130,302,555 Those values still stand on the books of the commission un¬ disturbed, the commission holding that it has neither the au¬ thority under the law as it is, nor the means, to make re¬ valuations. The railroad commission’s valuations when made, and most of them were made, in 1894 and 1895, purported to cover only 22 the value of the physical properties then owned by the rail¬ roads, which is to say, the value of the material of those rail¬ roads in position, and the equipment. To give you an idea of the values fixed on railroads at that time and how those values compare with the values now fixed on same for taxation, I quote the following figures per mile on some of the important lines, the appraisement including not only road and fixtures, but also equipment: Date Com. Taxed in Com. Val. Valuation. 1909 at Fort Worth & Denver City. . 1894 $12,708 $34,355 Galveston, Harrisburg & San Antonio.... . 1894 17,602 34,890 Gul Colorado & Santa Fe. . 1895 17,140 28,945 Galveston, Houston & Henderson . . 1895 31,259 * 52,089 Houston & Texas Central . . 1894 21,186 31,895 Houston, East & West Texas . . 1895 10,698 24,487 International & Great Northern. . 1895 18,051 25,969 Missouri, Kansas & Texas . . 1894 15,968 30,395 St. Louis Southwestern of Texas. . 1894 16,049 16,805 San Antonio & Aransas Pass. . 1894 12,618 22,592 Texas & Pacific . . 1894 17,057 36,692 Texas Central . . 1894 13,323 15,307 Wichita Valley . . 1894 9,477 26,172 I have quoted these figures to show you how just it is to pass this bill proposing (i) to authorize periodical revaluations of railroads, and (2) to make the valuations for stock and bond purposes include every element of value considered by the State for the purposes of taxation. I do not know whether the valuations fixed on the proper¬ ties of the railroads by the commission in 1894-5 were fair or unfair. Be that as it may, I do believe that the values fixed by the State tax board today are actually less than the real values of those lines today. The spectacle, viewed from the standpoint of the people whom railroad builders must interest if they would build railroads, of Texas holding to one valua¬ tion for stock and bond and rate making purposes, and fixing another more than twice as high for the purposes of taxation, is one that so long as it continues, would paralyze the genius of Hill or Harriman, were they young and setting out on their careers in this field. 23 There are only a few of us left in Texas with hardihood to continue our struggles for the development of independent railroad projects. Out in the Panhandle at Dalhart, Mr. Wiest’s little line has gone into the hands of a receiver; down at Bartlett, the Bartlett & Florence line is in the hands of a receiver; at Temple their new line to the northwest is in trou¬ ble; Sam Lazarus with his Acme, Quanah & Pacific, Wm. Carlisle with his Beaumont & Great Northern; Morgan Jones and associates with the Abilene & Southern, Kell & Kemp with their Wichita Falls lines, and a few others are battling bravely against many difficulties for the development of their sections of Texas. These men have put their private fortunes under their projects and to do so takes the courage of heroes. In the development of the State’s railroad policy the attitude and work of these men should be remembered, lest they be ground to death between the upper and nether millstones. In conclusion, I would add that I have personal knowledge of negotiations that were lately under way contemplating putting together of old lines and the construction of new mile¬ age which would create a new and important route through this State. The old mileage sought to be included is today- valued by the commission for stock and bond purposes at fourteen thousand dollars per mile less than the valuation of the State tax board; the proposed purchasers might see their way clear to buy on the basis of the tax board valuation. But it cannot be done unless the lines can be capitalized for that amount. What becomes of the transaction will depend largely on the action of this legislature with reference to the bill now before you. 24 APPENDIX. Smyth vs. Ames, 169 U. S., 466, (18 Sup. Ct. Reports, 418). (Affirming 64 Federal, 165). (Decided by the Su¬ preme Court March 7th, 1898), (43 Lawyer’s Edition, 819). In San Diego Land and Town Co. vs. City of National City, (174 U. S., 742; 42 Lawyer’s Edition, 1155; decided May 22nd, 1899) the principle under consideration is re-announced, as follows: “What elements are involved in the general inquiry as to the reasonableness of rates established by law for the use of prop¬ erty by the public ? This question received much consideration in Smyth vs. Ames, above cited. That case, it is true, related to rates established by a statute of Nebraska for railroad com¬ panies doing business in that State. But the principles involved in such a case are applicable to the present case. It was there contended that a railroad company was entitled to exact such charges for transportation as would enable it at all times, not only to pay operating expenses, but to meet the interest reg¬ ularly accruing upon all its outstanding obligations and justify a dividend upon all its stock; and that to prohibit it from main¬ taining rates or charges for transportation adequate to all thosie ends would be a deprivation of property without due pro¬ cess of law, and a denial of the equal protection of the laws. After observing that this broad proposition involved a mis¬ conception of the relations between the public and a railroad corporation, that such a corporation was created for public pur¬ poses, and performed a function of the State, and that its right to exercise the power of eminent domain and to charge tolls was given primarily for the benefit of the public, this court said: Tt cannot, therefore, be admitted that a railroad cor¬ poration maintaining a highway under the authority of the State may fix its rates with a view solely to its own interests, and ignore the rights of the public. But the rights of the pub¬ lic would be ignored if rates for the transportation of persons or property on a railroad are exacted without reterence to the 25 fair value of the property used for the public or the fair value of the services rendered, but in order simply that the corpora¬ tion may moet operating expenses, pay the interest on its obli ¬ gations, and declare a dividend to stockholders. If a railroad corporation has bonded its property for an amount that ex¬ ceeds its fair value, or if its capitalization is largely fictitious, it may not impose upon the public the burden of such increased rates as may be required for the purpose of realizing profits upon such excessive valuation or fictitious capitalization; and the apparent value of the property and franchises used by the corporation, as represented by its stocks, bonds, and obliga¬ tions, is not alone to be considered when determining the rates that may be reasonably charged.’ 169 U. S., 544 (42:848). In the same case it was also said that ‘the basis of all calcula¬ tion as to the reasonableness of rates to be charged by a cor¬ poration maintaining a highway under legislative sanction must be the fair value of the property used by it for the con¬ venience of the public. And in order to ascertain that value, the original cost of construction, the amount expended in per¬ manent improvements, the amount and market value of its bonds and stock, the present as compared with the original cost of construction, the probable earning capacity of the prop¬ erty under particular rates prescribed by statute, and the sum required to meet operating expenses, are all matters for con¬ sideration, and are to be given such weight as may be just and right in each case. We do not say that there may not be other matters to be regarded in estimating the value of the property. What the company is entitled to ask is a fair return upon the value of that which it employs for the public convenience. On the other hand, what the public is entitled to demand is that no more be exacted from it for the use of a public highway than the services rendered by it are reasonably worth.’ 169 U .S.. 546 (42:819). “This court had previously held in Covington & Lexington Turnpike Road Company vs. Sandford, 164 IT. S., 578, 596, 598 (41 :56 o, 566, 567)—which case involved the reasonable¬ ness of rates established by legislative enactment for a turnpike 26 company—that a corporation performing public services was not entitled, as of right and without reference to the interests of the public, to realize a given per cent, upon its capital stock; that stockholders were not the only persons whose rights or interests were to be considered, and that the rights of the pub¬ lic were not to be ignored. The court in that case further said: ‘Each case must depend upon its special facts; and when a court, without assuming itself to prescribe rates, is required to determine whether the rates prescribed by the legislature for a corporation controlling a public highway are, as an entirety, so unjust as to destroy the value of its property for all the pur¬ poses for which it was acquired, its duty is to take into consid¬ eration the interests both of the public and of the owner of the property, together with all other circumstances that are fairly to be considered in determining whether the legislature has, under the guise of regulating rates, exceeded its constitutional authority, and practically deprived the owner of property with¬ out due process of law. * * * The utmost that any corpora¬ tion operating a public highway can rightfully demand at the hands of the legislature, when exerting its general powers, is that it receives what under all the circumstances is such com¬ pensation for the use of its property as will be just both to it and to the public/ “These principles are recognized in recent decisions of the Supreme Court of California, San Diego Water Co. vs. City of San Diego (1897), 118 Cal., 556 (38 L. R. A., 460) ; Red¬ lands L. & C. Domestic Water Co. vs. City of Redlands (1898), (121 Cal., 365) ; 53 Pac., 843, 844. “The contention of the appellant in the present case is that in ascertaining what are just rates the court should take into consideration the cost of its plant; the cost per annum of op¬ erating the plant; including interest paid on money borrowed and reasonably necessary to be used in constructing the same; the annual depreciation of the plant from natural causes re¬ sulting from its use; and a fair profit to the company over and above such charges for its services in supplying the water to 27 consumers, either by way of interest on the money it has ex¬ pended for the public use, or upon some other fair and equit¬ able basis. Undoubtedly, all those matters ought to be taken into consideration, and much weight be given them, when rates are being fixed, as under all the circumstances will be just to the company and to the public. The basis of calculation sug¬ gested by the appellant is, however, defective in not requiring the real value of the property and the fair value in themselves of the services rendered to be taken into consideration. What the company is entitled to demand, in order that it may have just compensation, is a fair return upon the reasonable value of the property at the time it is being used for the public. The property may have cost more than it ought to have cost, and its outstanding bonds for money borrowed and which went into the plant may be in excess of the real value of the prop¬ erty. So that it cannot be said that the amount of such bonds should in every case control the question of rates, although it may be an element in the inquiry as to what is, all the circum¬ stances considered, just both to the company and to the public.” In the case of Chicago, etc., Ry. vs. Tompkins, 90 Federal, 368 (North Dakota), the Circuit Court of Appeals discuss the principles at length (opinion delivered by that court July 6th, 1898), citing Smyth vs. Ames, and then proceeding upon the principle, make a calculation from the record in order to arrive at the reasonableness of the rate. When the case reached the Supreme Court, 176 U. S., 168 (44 Lawyer’s Edi¬ tion, 417), (decided January 22nd, 1900), the principle under consideration was not discussed, but the Supreme Court pro ¬ ceeded at once to consider the actual value of the properties of the railroad in question and its gross receipts, expenditures, etc., and although the matter of outstanding bonded indebted¬ ness in excess of such values was in the case, it received no consideration by the Supreme Court in passing upon the rea¬ sonableness of the rate in question. The Supreme Court re¬ versed the case because the calculation seemed not based upon 28 sufficient facts and directed that a master be appointed to in¬ quire more minutely into gross receipts and expenditures of the railroad in question. In Chicago, etc., Traction Co. vs. City of Chicago, 65 Northeastern, 470, the Supreme Court of Illinois followed Smyth vs. Ames. Decided by the Supreme Court of Illinois, Oct. 25th, 1902. In Mathews vs. Corporation, etc., 106 Federal, 8 (decided Feb. 5th, 1901), the United States Circuit Court of North Carolina follows Smyth vs. Ames. In Northern Pacific Railroad Co. vs. Keyes, 91 Federal, 49 (decided December 23rd, 1898), and other cases decided since that year, the elements that enter into the consideration of the reasonableness of a rate are mentioned and the stock liability and bonded indebtedness are not among them. 29