Uh *Rary BEFORE THE Jfnteratate (Eflmmrro OIommtfiHum I. & S. DOCKET 555 WESTERN ADVANCE RATE CASE. IN RE ADVANCE IN RATES IN WESTERN CLASSIFICATION TERRITORY. BRIEF AND ARGUMENT As To FINANCIAL CONDITION OF RAILROADS ON BEHALF OF THE STATE RAILROAD AND PUBLIC SERVICE COMMIS- SIONS OF MINNESOTA, NEBRASKA, KANSAS, SOUTH DAKOTA, NORTH DAKOTA, OKLAHOMA, LOUISIANA, IOWA, ARIZONA, ARKANSAS, COLORADO, IDAHO, MONTANA, NEVADA, NEW MEXICO AND TRAFFIC BUREAU OF UTAH. CLIFFORD THORNE, W. M. BARROW, H. T. CLARKE, JR., P. W. DOUGHERTY, A. J. EDGERTON, C. E. ELMQUIST, A. E. HELM, J. H. HENDERSON, G. A. HENSHAW, F. A. JONES, WILLIS E. REED, W. H. STUTSMAN, OLIVER E. SWEKT, THE UNIVERSITY OF ILLINOIS LIBRARY 335* UU3W "^Iw **%*. * TOPICAL INDEX. PRELIMINARY STATEMENT 1 THE ISSUES 6 THE EVIDENCE 13 Differences — East and West 13 Freight Rates 13 Operating Ratios 16 Horizontal Increase in the East 20 Railroads in the East 20 Weak Sisters versus Representative Rail- roads 21 The Emergency in the East 23 1914 Lowest Net Revenue in East Since 1908 25 1914 Highest Net Revenue in West, Save 1913 25 European War 25 Inadequate Maintenance in East 29 Adequate Maintenance in West 30 Selected List of Railroads 30 System Figures versus Subsidiary Lines .... 31 Territory and Railroads Involved 31 Mr. Wettling's List of Railroads has all the essentials of a sleeted list, and cannot be accepted either as covering the situation as a whole, or as containing the Repre- sentative Railroads serving the territory involved 40 We find the railroads specifically named in the Suspension Order of the Commission in this case to fairly represent the terri- tory sought to be covered 49 Discussion of Groupings 51 ^ 353802 ii Northwestern Group 54 Southwestern Group 57 Justification for division of the Southwestern and Northwestern Groups 60 Conditions in the Southwest 65 Amount Involved 68 Cost of Railway Supplies 72 Labor Charges 75 Return on New Capital 80 Reductions and Advances 82 ANALYSIS MADE BY MR. POWELL OF REPRESENTATIVE RAILROADS INCLUDED IN MR. WETTLING's LIST AFTER PLACING PERIODS ON SUBSTANTIALLY THE SAME BASIS 85 1914 a Year of Depression 89 Excessive Depreciation Charges 93 Burlington Railroad 94 Atchison, Topeka & Santa Fe 99 In actual practice, and in the face of Theories, we find that the adequacy, or inadequacy, of the depreciation charges for a given rail- road depend upon the amounts charged to repairs 101 THE ARGUMENT 102 Railroad companies that are honestly and intelli- gently constructed, financed and managed, are entitled to a reasonable return on their prop- erty over and above all legitimate operating expenses; and their securities should be at- tractive investments. Justice entitles them to this, and the interests of the public demand it. Elementary Principles 102 Periodical rise and fall in prosperity of any business 102 Panics 102 New Construction 103 Changes in Accounting Rules 103 iii Changes in Maintenance Standards 103 Book Value 104 Weak Property not Correct Standard 104 Subsidiary Lines not Standard 105, 106 Mismanagement 105 Capitalizing Permanent Improvements Built Out of Earnings 105, 110 Representative Railroads Ill The Basis for Testing the Adequacy of Revenues . 114 Different Tests 117 Railroad Test: Property Investment 118 Lane Test 123 Railroad Securities Commission Test . . . 123 Prouty Test 123 Supreme Court Test 123 I. WESTERN RAILROADS HAVE ADEQUATE FUNDS WITH WHICH TO MAINTAIN THEIR PROPERTIES 125 II. THE SECURITIES OF REPRESENTATIVE WESTERN RAIL- ROADS ARE MORE ATTRACTIVE TO THE INVESTING PURLIC THAN THOSE OF COMPANIES ENGAGED IN ANY OTHER LINE OF INDUSTRY IN THE UNITED STATES 128 Railway Credit 130 CARRIERS ' EVIDENCE ON CREDIT — Differences in Eastern and Western Case 131 Festus J. Wade 131 Mr. Schaff 136 Mr. Felton 140 J. W. Lusk 142 Wettling on Credit 144 Ignorance as to Financial Needs of Carriers . 145 Burlington 145 North Western 146 Milwaukee 147 Union Pacific 147 Northern Pacific 147 Great Northern 148 It Great Western 148 Southwestern Group Territory 149 Chicago, Rock Island & Pacific 149 Margin between Stock Rate and Bond Rate 150 shippers' evidence on credit 151 Methods of Analyzing 151 Contrary to the testimony of Mr. Wade the increase in the yield on St. Louis bonds since 1900 has been 25% 155 The decline in the price of these railroad bonds has been at a less rate than the de- cline in the price on government bonds, or those of the twenty largest cities in the United States 156 Comparison of the average yield on the bonds of railroad companies in the Northwestern, Southwestern, and Western and South- western Groups combined with the pure money rate 157 Are the Securities of Western Railroads Attrac- tive to Investors ? 161 Yields on New Issues of Securities 167 Conclusion as to New Issues 172 Short Term Obligations 172 Yields on Bonds of Southwestern Roads 174 Stock Prices 177 Comparison of Actual and Relative Prices of Railroad Stocks with Those of Industrials . 178 Judgment of the Investor 181 III. THE NET REVENUES OF THESE CARRIERS ARE ADE- QUATE, AS PROVED IN THIS CASE, AND JUDGED BY THE STANDARDS WHICH HAVE BEEN ESTABLISHED IN THE PAST BY THE UNANIMOUS ACTION OF THIS COMMISSION 183 Tendencies of Earnings 183 Return on Book Value 185 Return on Capital 188 T Northwestern Group 193 Southwestern Group 197 Return on Value 199 Chicago & Northwestern Railway 202 Freight Revenue and Density 203 Revenues and Expenses 204 Rates of Dividends and Interest 205 Return on Book Value and Analysis of Same . 206 Chicago, Burlington & Quincy 212 Rates of Dividends and Interest 214 Revenues and Expenses 215 Freight Revenue and Density 216 Credit 217 Atchison, Topeka & Santa Fe 218 Revenues and Expenses 219 Rates of Dividends and Interest 220 Exaggerated Book Value 220 Enormous Maintenance Charges 220 Chicago, St. Paul, Minneapolis & Omaha 221 Connection with Chicago & North Western . . 222 Chicago, Great Western 222 Not Representative 223 Chicago, Milwaukee & St. Paul 224 Increase in Property Investment 225 Changes in Accounts 227 Minneapolis & St. Louis 229 INVESTORS IN WESTERN RAILROAD SECURITIES, AS A WHOLE, HAVE REEN EARNING ADEQUATE RETURNS. .231 Returns to Investors Earned by Railroads in Different Groups 235 WHEN CONSIDERING THE REASONABLENESS OF RATES, RATES, IF THE CHIEF ISSUE IS NOT ONE OF DIS- CRIMINATION, BUT CONCERNS THE AMOUNT OF REVENUE, THIS QUESTION IS AT THE BASIS OF ALL COMPUTATIONS : DO THE RATES YIELD A REASONABLE RETURN UPON THE PRESENT VALUE OF THE PROP- ERTY DEVOTED TO PUBLIC SERVICE f 244 vi Supreme Court Basis 244 What is a Reasonable Rate of Return? 245 Present Fair Value 262 Valuations Made by States 265 Capitalization Compared with Valua- tions 268 Wisconsin Valuation of Railroads 268 Minnesota Valuation 269 Nebraska Valuation 270 South Dakota Valuation 271 Rate of Return on Jurgensen 's Valuation of Railroads Involved 277 Rate of Return on State Valuation 278 RECAPITULATION 279 PROPOSED FINDINGS. I. That, in the Western District, freight rates are much higher, and operating ratios are much lower, than in any other territory. II. That western railroads have adequate funds with which to maintain their properties. III. That the respondent companies have failed to prove that their credit has become impaired, or that their securities are unattractive to investors, thereby rendering them unable to secure adequate funds for betterments and improvements. On the contrary, the record shows that their new construction during recent years, has surpassed anything in their former history. IV. That the respondents have failed to sustain the burden of proof, that their revenues constitute an inade- quate return upon the fair value of their properties. % PRELIMINARY STATEMENT. THE ISSUES. DISCUSSION OF EVIDENCE. ARGUMENT. PRELIMINARY STATEMENT. Are western railroads entitled to more revenue through advanced freight rates, is the issue presented in this case. Secondary to this main proposition is the question whether the carriers are entitled to the particular ad- vances which they have proposed at this time. Railroading and agriculture are the two greatest indus- tries in the United States. In this case, the railroad in- dustry seeks to levy an additional tax upon agriculture. We have witnessed with pride the marvelous growth of western railroads. Those who have had the genius and foresight to promote these enterprises, have generally had the genius, likewise, to amass fortunes while this development has been in progress. Railroads have played an important role in the indus- trial development of the west. Likewise, the farmers have contributed to the growth and prosperity of these carriers. Neither group can live without the other. Both need money. One interest must consider the needs and the rights of the other. The Eastern case was described by you, in the decision, "as, in some sense, a controversy between the consuming 2 PRELIMINARY STATEMENT public which pays the rates, and the investor who furn- ishes the facilities for moving the freight." (Five Per Cent Rate Case, 31 1. C. C., 351, 359.) The present proceeding is rather between the producer and the railroad, than the consumer and the railroad. It is very commonly stated that the consumer pays the freight. Frequently, however, the producer pays an ad- vance, especially on the raw product, while the consumer generally pays an advance on the finished article. It was quite conclusively established in this proceeding that the producers of live stock and grain are the parties who will pay the proposed advances on those products. On pack- ing house products and broom corn, it seemed the manu- facturer was the one vitally affected, and who raised objection. The railroads, and the territory involved, are substan- tially the same as those considered in the two cases decided February 22, 1911, entitled, the Western Ad- vanced Rate Case, 20 I. C. C, 307, and the Railroad Com- mission of Texas v. A., T. & St. Fe, et ah, 20 I. C. C, 463. For convenience we shall refer to the latter as the South- western Case of 1910. The territory corresponds closely to Western Trunk Line, Trans-Missouri, and South- western Committee Territories. May 21, 1914, a meeting was held in Chicago, by a group of men representing the western railroads. There it was decided to undertake to increase the freight tax on western shippers. A comprehensive program of action was agreed upon. The particular group of rates in- volved in this proceeding is only one part of a general movement to increase their revenues. Various methods were unanimously agreed upon, including: specific ad- vances on special commodities, the elimination of various privileges, including stoppage in transit privilege, the concentration privilege on dairy food products, and a wholesale advance in passenger rates. PRELIMINARY STATEMENT 3 The authorized representatives of sixteen states de- cided to ask that all be consolidated in one case, in which the adequacy of the entire revenues of each of these Avestern railroads should be thoroughly investigated. The Commission joined a large number of the cases into one proceeding, but separated the passenger rate case, and others, from this part of the freight case. The Commission will not make an exhaustive investi- gation of the financial condition of these carriers in each one of these cases. That forces the issue at this time, for these western railroads. The railroads are relying chiefly upon what they call property investment, which is the book value of their property, as the basis for their claims ; a basis which this Commission repudiated seven years ago, saying that no accountant of any standing would accept this figure for a moment, as any evidence whatever of original cost, or present value. There are certain fundamental differences in conditions between the west and the east, of a controlling character. Western rates are already more than 25% higher than eastern rates. The western railroads make no claim be- cause of the European war, and its effect on wages, sup- plies, or credit. The railroads have held out to the public the claim that they were unable to buy the necessary supplies for main- taining their properties ; and that, consequently, business generally was suffering because of this condition. Dur- ing this case, however, the western railroads have speci- fically abandoned that issue by statement of record made by the leading counsel for the carriers. A striking contrast between the Eastern and Western cases is that in the Eastern the executive officials of strong, representative railroads, handling over one-half the traffic in the whole territory, took the stand. In the 4 PRELIMINARY STATEMENT Western they selected the presidents of three of the weak railroads, to go on the stand to testify as to their financial needs. This course of action we believe is wrong. A weak line cannot be accepted as a standard or test for the reasonableness of rates. There are weak sisters in all lines of industry. It is the successful that sets the pace for the rest of the world. The adoption of a different doctrine would be contrary to that condition which prevails in all other lines of busi- ness in the country. It would be setting a premium upon inefficiency. Some would have us believe that because this Com- mission has granted general advances in one part of the United States, that it therefore must grant these advances proposed by the western railroads. It will be a strange situation when it develops that because one group of rail- roads serving one territory is entitled to an advance, therefore all other railroads in the United States are also entitled to an advance; because certain railroads need more money, therefore, all other railroads need more money. Let us pause and carefully weigh the meaning of such course of action. What would it indicate ? Such argument furnishes interesting food for thought. Has it ever happened in the history of this Commission, that because reductions are granted in some cases, for some railroads, in some portions of the United States, that therefore, ipso facto, reductions have been granted on every other railroad, in every other part of the United States where people have asked for them! Strange will be the conditions when that day arrives. Regulation will have outlived its usefulness. Every case must depend upon the circumstances and conditions surrounding the matters at stake. That is axiomatic. In 1910 you granted advances in the south- west and denied them in the East and the west. The courts may permit advances in Ohio, or West Virginia, or PRELIMINARY STATEMENT 5 North Dakota, and at the same time decline to advance rates in Minnesota and Missouri. The water works in Chi- cago, or the telephone lines in Indiana, may be entitled to advances; while those in California may not be entitled to increases. The level of rates, coupled with the density of traffic, produces different revenues. You are now deal- ing with approximately two-thirds of the American na- tion. There may be some portions of this territory where advances are justified, and other portions where they are not justified. We will present to you the facts as we find them. THE ISSUES. BURDEN OP PROOF. The Act of Congress of June 18, 1910, places the burden of proof upon the carriers to show that any rate increased after January 1, 1910, or sought to be increased after the passage of said Act, is just and reasonable. This Commission in the Western Advanced Eate Case of 1910 construed the law just the way it reads. There is no room for discussion. The burden of proof concerns not only that portion of the new rate which is the increase over the old rate, but the burden of proving the reason- ableness of the advanced rate as an entirety rests upon the carrier. This is the distinguishing characteristic between the English and American statutes upon this subject. This Commission in its unanimous opinion of 1910 clearly recognized that distinction we have referred to, in the following language : ''It is urged with much force and an extensive citation of authority that the purpose of this provi- sion was to limit the investigation of the Commission to the consideration of the necessity for ' the increase in the rate.' The purpose of Congress, it is said, was to regard all rates in effect on January 1, 1910, as the maxima, which could not be increased until it was shown that there was reason and necessity for the specific increase made. This would limit our in- vestigation as to all rates increased since that time to the simple question: What additional expenses have attached to the movement of these articles which make proper an increase in the rate ? THE ISSUES 7 1 ' Such a construction of the statute is suggested by decisions of the English courts in interpreting the railway and canal act of 1894. We think, however, it is clear from the language of that statute, as well as its history, that the purpose of Congress differed from the purpose of Parliament. The English law was based on a legislative conclusion that existing rates were already sufficiently high and should not be increased excepting as transportation costs in- creased. Therefore the English commission was to deal with the increase itself in the rate and not with the increased rate. This distinction is fundamental in the consideration of the laws of the two Govern- ments. ' ' That places a heavy burden upon the carrier; but it is not a harder task than would otherwise fall upon the shipper; that has, in fact, rested upon the shipper in the great majority of cases in the past. The task of sus- taining the burden in a great controversy like this must not be lightly disregarded. The carrier has the necessary facts, or the facilities to secure the same, in his possession. It is right that he should have the burden of proof; and until it is repealed, or the courts hold it unconstitutional, that must be accepted as law. The issues in the ordinary case before the Commission seldom rest upon the question of revenues as a whole. With only a few exceptions, prac- tically all cases that have come before you have turned upon questions of discrimination. This is not true of many cases which have been determined by state com- missions or municipalities, which have been appealed to the Supreme Court. In this case the carriers themselves have made the issue: inadequate revenues as a whole. This action carries with it some far-reaching conse- quences. We must consider the adequacy of their present revenues; what their actual profits are (this carrying with it all the complicated questions of accounting and what constitutes profits) ; whether those profits are reasonable or not; what is a reasonable profit, and, back of that, what 8 THE ISSUES is the best evidence of the value upon which they are entitled to such a profit. Many questions of law and public policy are raised. Most of these questions have been discussed at length in the decisions of this Commission, and the Supreme Court. THE OWNERS OP THE RAILROADS. Who are the owners of our railroads? Can we deal with some colossal giant of finance who owns one or sev- eral railroads like the North Western, or Milwaukee f Of course that is an absurdity. We are forced to deal with facts as they are, not as somebody might dream them to exist. There are two classes of people who own the rail- roads : first, bondholders, and second, stockholders. There are three distinct groups of interests involved in this controversy: 1. Holders of railroad bonds; 2. Holders of railroad stocks ; and 3. The public, including producers, shippers and con- sumers. The bondholders are chiefly interested in maintaining the integrity of railway properties, as going concerns. This Commission must assume that the rates on the funded debt of these companies are reasonable, for they are contractual. The man who agrees to loan his money at a certain per cent per annum cannot come in here and ask for more; his only interest here is to see that the ability of his company to meet its obligations is not jeopardized, or taken away. While none of the companies have claimed the usual interest on their bonds, yet it has been strongly urged that railway securities are no longer desirable investments. If this be true, then there is some ground for alarm on the part of the bondholder. He is primarily interested in seeing that the property is well THE ISSUES 9 maintained, and that the credit of his company is not impaired. If a company's bonds are no longer salable, it necessarily is of importance to the man who has bought some of those bonds in the past, and now holds them. To the bondholder, the chief issues in this case concern the credit of the railway companies. If they can no longer sell their securities, needed improvements cannot be made, and the property will soon start on a downward course, thereby threatening his security. The owners of railroad bonds are interested in securing a high rate of return on their investment, and stability in the security. So far as the first proposition is concerned, any advances that might be granted in the existing rates will not result in an increase of one-tenth of one per cent in the interest rate on outstanding bonds. No one has suggested an increase in the interest rate on the bonds outstanding in the hands of the poor widow, whose hus- band purchased them thirty years ago. As to the future owners of bonds, one of the principal arguments urged in support of an advance in freight rates is, that it will serve to reduce the interest rate paid on that class of securities. Consequently, so far as any possible increase in the rate on bonds is concerned, that is not involved in this case to the slightest extent. The sole interest that the bondholder has in this case is the pres- ervation of the stability of his security. If the record shows the carriers * property is deteriorating, or its credit is rapidly declining, that threatens the security of out- standing bonds, then the bondholder is vitally involved. We will give somewhat elaborate consideration to this phase of the case. STOCKHOLDERS. The second group of people that are concerned, and have transportation for sale, are the stockholders. The stockholder is the chief party in interest in this proceed- ing, and will reap the largest reward from any advance 10 THE ISSUES granted. The railroad is the seller of transportation. The public is the purchaser of transportation. A clash of in- terests exists in any proposal to increase freight rates for the purpose of simply increasing the profits of the stock- holders. There is not a particle of dishonesty upon either side of that question. It is the same old conflict between the purchaser and the seller, that exists in the barter and sale of cabbages, land, buildings and jack-knives. The only difference between this situation, and that prevailing in business generally, is that we have here, in one indus- try, several hundred thousand people, all compactly or- ganized under one head — Mr. C. C. Wright. Competition is a forgotten myth of former days. The Sherman Anti- Trust Law has long since been dead, and buried, so far as our railroads are concerned. It is this fact which exists in no other industry, that compels the exhaustive, searching investigation that should be given in a pro- ceeding of this character. The stockholder is concerned about both the mainte- nance and the credit of his company. The ability to borrow money, and to sell stocks and bonds, is necessary in order to keep abreast of the times, to hold business, and to maintain the present earning power of the property. Another issue, however, is of equal importance to the stockholder. He is not so well protected as the bond- holder; and, on the other hand, there is no contractual limit, ordinarily, on the maximum return upon his invest- ment. Naturally he wants to earn as much as he can. The real conflict in this case is between the public and the stockholder. On many matters, the interests of the railway com- panies and the public are in common. On the chief issues in this case, however, the interests of the stockholder, and the public, are diametrically opposed to each other. The railroads are the sellers of transportation, we are the purchasers. They want to get as much as they can within THE ISSUES 11 reasonable bounds, and we want to secure their services as cheaply as we can, without doing them an injustice, or hindering their further growth and development. The carriers urge that increased expenses have re- duced the rate of return to such an extent as to injure their credit, so that they cannot secure funds necessary for improvements and betterments to their properties. A railroad company secures its funds in just two ways : 1. Through current earnings ; and 2. Through issues of notes, stocks and bonds. The railroad company is entitled to maintain its prop- erty out of current earnings; but it is not entitled to demand current earnings adequate to build permanent improvements. Such betterments must be built by the owner of the railroad and not by the public. You must not make the public build the railroad for somebody else, and then pay a return to that party on its value. This is a question of law and public policy that is at issue in this case. The method by which a company secures these funds for improvements is through capital issues. We are, therefore, compelled to make an analysis of the capitali- zation ; to consider the net corporate income, the funded debt, the relation of stock to debt, and all other essential phases of its capitalization. It is proper and necessary for us to examine the prop- erty investment and the net operating income ; but when a company says it cannot secure funds for certain pur- poses that are legitimate and necessary, and makes that its chief argument before this Commission and before this country, in support of its claim for money, it behooves us to see if that claim is true or is not true. If a company claims its securities are no longer at- 12 THE ISSUES tractive to investors, that is a serious charge; but we should not immediately undertake to find what makes those securities unattractive, and enter into a labyrinthal analysis of percentages of this and of that. Our first task should be to find out whether that claim is false or true. The task of investigating the credit of these railroads is the first task in the case. It is not difficult to find out whether their securities are attractive or not. When a leading banker of the West takes the stand, and says that the railroads have to pay 50 to 75% more than industrial companies, generally, have to pay to secure money, that proposition can be tested very con- clusively. It becomes necessary for us to face the situation clearly as it exists. It is folly for us to deliberately assume that a company's credit is weakened, just because that company claims it. If that is all that is desired of a regulating body of this character, it is folly to have any hearings whatever. Let the carriers say they need more money, and then give it to them. The first task to perform is to see whether their credit is impaired, and to find out what the facts are. Summarizing the various important phases of a pro- ceeding of this character, we find the issues to center around the following propositions : A. Are the railroads able to maintain their properties as they ought to be maintained ? B. Are railroad securities attractive to investors? C. Are those who own our railroads receiving a just return, upon the reasonable fair value of the property entitled to such return? DISCUSSION OF EVIDENCE. We will here discuss such portions of the evidence as do not readily fall under the divisions we have made of the argument. It was announced by the Commission, and agreed to by counsel, that the official files of the Commission containing the reports of the carriers to the Commission and to their stockholders may be referred to as part of the record in the case. (tr. 14790-14791.) DIFFERENCES-EAST AND WEST. FREIGHT RATES. Freight rates in the west are much higher than they are in the east. This is evidenced by two exhibits. First, we call attention to the accompanying exhibit introduced by Witness Chambers: 14 THE EVIDENCE Eh — 3 s GO ZZ o K £i c; := e ! 5 sinrc uox J»d b(U a) 9 < sil!K uojq jaa anuaAdH be- j = smre dnudAdH tKU, as anre uoj; jaj anuaAaa CI » JJ S t^ n « M N f S HMM*0*HO OJOSCOMMNIMO ^•■^ooooeoeoT^t-ia-^to » - - o u © IS © £5 .2S -I* 2 *» » 3 50 tC J) Q M 5^£ ^00 fe ej P s §"2 SOU "3 fl 2/ a ^^oq a» ©£ © "* a •*£ t* ** J4 in ea 00 oo u 2 S lil'-Ii SllJil •1 ". ,1 as S o IS a » • - - CO • ® § © eo 2 CQ S at © •"> 3 K a 6 S 9 ■< © e8 © <-; ® «*© «J aj fa °. ej o o o W M " .H w o a> ■a I hn as y u * _© ■ - - = "3 © O - - § 111 2 -Ho i > ■ K 60 a «5«o 3 o •3 2.3 1*11 9 so O a) fa THE EVIDENCE 15 It will be noticed that the revenue per ton mile on freight traffic in the western district as a whole, also in the northwestern and southwestern territories, is from 20% to 60% higher than in Official or Central Freight As- sociation, or southern territories, while the average haul in the western district as a whole, as well as in the north- western and southwestern territories, is substantially- longer than in the eastern or southern district. This fact, if other conditions were analogous, would justify lower revenues per ton mile in the west than in the east and south. The accuracy of the figures shown in this exhibit was not questioned by any party to the case. For the year 1914, the average revenue per ton mile in Official Classification Territory was 6.64 mills, in Central Freight Association Territory 5.17 mills. In the western district as a whole it was 8.92 mills, or 34% higher than in Official Classification Territory, and 56% higher than in Central Freight Association Territory. In the Northwestern Territory the average revenue per ton mile was 8.12 mills, or 22% higher than in Official Classification Territory, and 42% higher than in Central Freight Association Territory. In Southwestern Terri- tory the average revenue per ton mile was 9.30 mills, which was 40% higher than in Official Classification Ter- ritory and 63% higher than in Central Freight Associa- tion Territory. The second exhibit in support of the proposition we have stated is Kirkland No. 2. This exhibit is prepared along precisely the same lines as the Morris Exhibits in- troduced in the Eastern Case, which persuaded the Com- mission that the level of freight rates in C. F. A. Terri- tory was lower than anywhere else in the country. This compilation prepared by Mr. Kirkland is much more thorough and exhaustive than Morris even attempted. It proves the situation just as effectively and conclusively as Morris ' Exhibit, only more so. Further, it completely substantiates the showing made by the single sheet ex- 16 THE EVIDENCE hibit presenting average revenues per ton mile in the given territories which we have described above. It has been conclusively proven beyond a question of a doubt that the freight rates in this western territory are very much higher than in Official Territory or C. F. A. Territory — rates which the Commission has of late had occasion to pass upon. OPERATING RATIOS, EAST AND WEST. Different policies of maintenance and of new construc- tion may produce different operating ratios at one and the same time, for different companies, that are absolutely equally prosperous. Again, your operating ratio may increase, and your profits may increase at the same time. In other words, your expenses may increase at a much greater rate than your earnings; and yet your net earnings will increase at the same time. A concrete example best proves this. Suppose you have a property earning $1,000 gross, with an operating ex- pense of $500. Suppose there is an increase of 80% in your expense and only 50% in your gross. In that case your new gross will be $1,500, and your new expense $900, leaving a net of $600, instead of $500, which you had the previous year. In this case your operating ratio the first year was 50%, and the second 60%. But your net reve- nues increased 20% in spite of an increase of 10 points in your operating ratio. The real test is not what is the ratio of expenses to earn- ings; but what is the ratio of your true net to the value of that property upon which you are entitled to earn a return. However, our friends, the railroads, place especial reli- ance upon operating ratios. For their benefit, we take pleasure in showing a comparison of operating ratios on THE EVIDENCE 17 the eastern railroads with the operating ratios on west- ern railroads. COMPARISON OF OPERATING RATIOS- WESTERN WITH EASTERN TERRITORY. WESTERN LINES EASTERN LINES 1914 1914 Northwestern Group: Trunk Line Roads: C, B. & Q 67.01 66.82 74.90 76.06 Penn. R. R. C, M. & St P N. Y. C. & H. R. C. & N. W 70.99 61.66 65.83 73.92 75.20 72.83 B. & O. G. N Penn. Co. M., St. P. & S. S. M.. N. Y., N. H. & H. C, St. P., M. & 0... 70.21 76.52 L. S. & M. S. U. P 57.75 60.50 75.95 80.77 70.85 82.32 B. & M. N. P Erie C. G. W N. Y. C. & St. L. M. & St. L 71.63 Representative Lines in Southwestern Group: A., T. & S. F 64.33 Coal Carrying Roads: So. Pac 59.75 64.35 69.40 St. L., I. M. & S Leh. Val. D. & R. G 69.14 74.77 61.85 64.97 P. & L. E. C, R. I. & P C. R. R. of N. J. St. L. & S. F 73.19 66.30 D. & H. 76.33 67.47 P. & R. M., K. & T 72.09 81.80 68.29 68.42 B. & L. E. Hocking Valley 64.34 D. L. & W. C. F. A. Lines: 89.03 C. C. C. & St. L. 78.87 P. C. C. & St. L. 74.66 C. I. & L. 78.56 Vandalia 83.43 C. & E. I. 82.32 L. E. & W. 79.91 G. R. & I. 86.63 C. I. & S. I **] 81.29 Wabash 65.49 75.96 35 Systems, Eastern Case 67.15 84.48 C. F. A.— Group III Eastern Cast 71.50 80.23 C. F. A. — Group I Eastern Case Authority: I. C. C. Preliminary Abstract of Statistics of Common Carriers for the year ended June 30, 1914. The foregoing table makes use of the ordinary operat- ing ratio figure, with which we are all acquainted. Mr. Wettling produces a new operating ratio by adding rents, 18 THE EVIDENCE taxes, etc. He does this on the alleged ground of making the figures comparable with previous years. But it will be noticed that, at the same time he fails to make a corre- sponding adjustment of the depreciation item prior to 1908, as Mr. Sturgis was fair enough to do in 1910. We will make those readjustments in our previous table, which Mr. Wettling did, placing the eastern and western lines on the same basis. This produces the fol- lowing results: THE EVIDENCE COMPARISON OF OPERATING RATIOS- WESTERN WITH EASTERN TERRITORY. 19 WESTERN LINES EASTERN LINES 1914 1914 Northwestern Group: Trunk Line Roads: C, B. & Q 72.90 71.87 80.88 82.12 Penn. R. R. C, M. & St. P N. Y. C. & H. R. C. & N. W 77.45 68.65 79.66 81.64 B. & O. G. N Penn. Co. M., St. P. & S. S. M.. 70.18 81.25 N. Y., N. H. & H. C, St. P., M. & 0... 78.07 81.85 L. S. & M. S. U. P 63.78 87.95 B. & M. N. P 66.22 75.47 Erie M. & St. L 79.63 80.15 89.81 N. Y. C. & St. L. C. G. W Representative Lines in Southwestern Group: Coal Carrying Roads: 68.97 74.93 Leh. Val. So. Pac 68.77 71.48 64.01 71.92 P. & L. E. St. L., I. M. & S C. R. R. of N. J. D. & R. G 73.54 83.06 69.72 74.66 D. & H. C, R. I. & P P. & R. St. L. & S. F 75.68 72.11 B. & L. E. T. & P 82.82 73.13 Hocking Valley M., K. & T 78.84 87.75 71.98 D. L. & W. Mo. Pac C. F. A. Lines: 98.53 C. C. C. & St. L. 85.14 P. C. C. & St. L. 86.92 C. I. & L. 86.37 Vandalia 89.12 C. & E. I. 92.39 L. E. & W. 87.31 G. R. & I. 82.98 C. I. & S. 93.06 Wabash 71.48 81.45 35 Systems, Eastern Case 93.04 C. F. A. — Group III Eastern Case 87.58 C. F. A. — Group I Eastern Case Authority: I. C. C. Preliminary Abstract of Statistics of Common Carriers for the year ended June 30, 1914. Note: The above ratios were computed after revising the Operat- ing Revenues by adding Revenue from Outside Operations and Rentals and after revising the Operating Expenses by adding Expenses of Out- side Operations, Rentals and Taxes. It will be noted the operating ratio in the Northwestern group for 1914 was 71.48, while in the Eastern territory 20 THE EVIDENCE for the 35 systems the ratio was 81.45, for C. F. A. lines Group III., 93.04, and for C. F. A. lines Group L, 87.58. Using the operating ratios to which we have been ac- customed in the past, which are given on the preceding table, it will be noted that for the Northwestern group, the operating ratio was 65.49 compared with the ratio of 75.96 for the 35 systems in the Eastern Case, 84.48 for C. F. A. lines Group in, and 80.23 for C. F. A. lines Group I. HORIZONTAL. INCREASE IN THE EAST. While there was a general uniform advance in the east except for short hauls, in this Western case the carriers propose innumerable variations in the advances, ranging from 5% to 100%. Practically the entire advance is cen- tered upon a dozen commodities, and in only a limited portion of the territory. RAILROADS IN THE EAST. The railroads in the east were constructed at a much heavier cost to the carriers by reason of the fact that they followed population instead of preceding it. They con- nected cities already established and thriving. In the west, the railroads very largely preceded population and civilization. Much of the right of way has cost them practically nothing. The growth of the west, ac- companying the railroad construction, has been phenomenal in character. The vast extent of land bon- uses, aggregating millions of acres, larger than the Ger- man Empire — which is exclusive of the enormous gifts of cities, counties, states and individuals — has made the ac- tual investment of western railway companies very small compared with that of eastern companies. The commercial development of the east has passed its zenith ; the center of manufactures and the center of pop- THE EVIDENCE 21 illation are rapidly approaching the western district; in other words, we are now witnessing, and will witness dur- ing the next quarter of a century, a continuous growth in the west, southwest and northwest, far surpassing the commercial development of the east. WEAK SISTERS VERSUS REPRESENTATIVE RAILROADS. One of the striking contrasts between the two cases relates to the character of the testimony offered. In the Eastern case the presidents of the representative rail- roads took the stand to testify as to their financial needs, including such companies as the Pennsylvania, Baltimore & Ohio and New York Central, three railroads which handle over 40% of the traffic in Official Territory. In the Western Advance Eate Case of 1910, the chief executives of both Western and Eastern lines testified as to their financial condition and need of additional funds, and as to their alleged inability to secure the same. In the present Western case, the only railroad official representing any of the Northwestern group of railroads who offered any testimony whatever, was Mr. Felton, President of the Chicago Great Western Eailroad, com- monly recognized as one of the weak properties in the territory. In the Northwestern group of railroads the great bulk of the traffic handled is carried by the Bur- lington, the North Western, the Milwaukee, the Chicago, St. Paul, Minneapolis & Omaha, the Soo Line, the Union Pacific, the Northern Pacific and the Great Northern Com- panies. No man took the stand who could testify that any of these railway companies were not able to secure all the money they needed for betterments, improvements and ex- tensions. No man took the stand to testify that these com- panies were in a good condition or a poor condition, finan- cially or physically. Mr. Felton gave a lot of glittering generalities about the railroad industry, but when asked 22 THE EVIDENCE specific questions as to other properties, he plead igno- rance, and, when asked specific questions as to his own property, he admitted that it was not an average or typical property in that territory ; that it was in a better condition physically and financially than in 1910; and that the Commission found it not entitled to any advance in 1910. (tr. 194.) In the Southwestern Territory, no official nor any per- son connected with the financial needs of the carriers, such as the Santa Fe, Southern Pacific and St. Louis & Southwestern, offered any evidence. The only per- have the testimony alone of Mr. Wettling. The only per- sons acquainted with the financial needs of any other southwestern railroad, aside from those we have named above, were Mr. Bush of the Missouri Pacific, Mr. Schaff of the Missouri, Kansas & Texas and Mr. Lusk of the Frisco. J. W. Lusk, one of the receivers of the Frisco line, made some sweeping statements about the poor conditions of railroads. His published statement that the railroads "were in the soup" proved to be founded merely upon a general impression, and was not based upon any investi- gation of his own. He admitted finally that his knowl- edge was restricted to the Frisco, sand he did not know anything about that prior to December 5, 1913; that he had never investigated the financial condition of the rail- roads as a whole in this territory; that he did not know that their net earnings in 1913 were greater than ever before in their history ; and he was unable to name what were the average or representative roads in this section, (tr. 589, 592.) The testimony of the other two gentlemen, testifying as to the M., K. & T. and the Missouri Pacific, will be dis- cussed in connection with the territory to the Southwest generally. THE EVIDENCE THE CARRIERS' EXHIBITS. The carriers' exhibits do not contain the data as to property investment, capitalization, or rate of return on individual companies. Other items they give individual- ly, but these basic factors they do not. No witness took the stand who had any personal knowl- edge as to the operating conditions or physical needs of any of the carriers in the case, with only four exceptions, the Chicago Great Western, M., K. & T., Missouri Pacific and Frisco. There was no discussion whatever of the condition of any other carrier in the territory, except as the same may be shown in statistical tables compiled from records on file with this Commission. Mr. Wettling was the only witness offered on behalf of the other companies in the case. He was unable to state whether any railroad was unable to secure all the money that it needed. He disclaimed any knowl- edge of their conditions or needs, financial or physical. He did not know whether they had any trouble in dispos- ing of their securities for needed additions and better- ments. He made no claim that they did not have ade- quate money to maintain their properties. He did not know the rate at which companies in any other line of business in the United States were able to borrow money. He could not name any company in any other line of busi- ness that had any better line of credit than representa- tive lines of railroads in this territory. THE EMERGENCY IN THE EAST. No emergency or crisis exists among our Western rail- roads as our Eastern friends sought so earnestly to prove concerning their properties. No attempt was even made to prove an emergency of that character demanding im- 24 THE EVIDENCE mediate relief. In doing this, the railroads in the west have acted wisely and properly, for there is no crisis. Several other marked differences between the situa- tion in the east and the west are disclosed by the supple- mental opinion in the Five Per Cent Case. The opinion states the "facts disclosed and occur- rences originating" subsequent to the date of the orig- inal order, and which facts justified a change in the orig- inal order, ' ' as presented at the further hearing may be summarized — first, complete returns for the fiscal year ending June 30, 1914, and returns for succeeding months ; second, the war in Europe." Let us now consider how these two important additions to the hearing in the Eastern case, which justified a con- clusion of a more crucial situation existing in that terri- tory, compared with the record as now completed in the Western Advance Rate Case. At the time of the original hearing you only had before you the facts as to July and August of the fiscal year 1914. At the time of the rehearing, you had complete reports for that year, and, in commenting upon those complete reports, you find "the indication is that some important items of cost have been relatively inelastic, or that a fall in gross revenues leaves an increasingly nar- row margin of net revenue." This remarkable conclusion is arrived at on the basis of the following fact: "While the gross revenue in that year declined only about 3.4% the net revenues shrank approximately 17.7% as against the previous fiscal year." If that shrinkage was due to the manipulation or the adjustment of accounts, and independent of actual rail- way operations not handled to prove a point, then the conclusion reached by this Commission was unfounded. Granted, of course, that the Commission is correct, then let us see if a similar situation exists in the west, for THE EVIDENCE 25 if it does not, then no such conclusion as therein stated follows. 1914 LOWEST NET REVENUE SINCE 1908 IN EAST. The Commission states in its supplemental opinion : "Not since 1908 have the net operating revenues of the carriers been so low as in the fiscal year end- ing June 30th, last." (32 I. C. C, 327.) 1914 HIGHEST NET REVENUE, SAVE 1913, IN WEST. Let us turn to the Northwestern Group of railroads. We find the net revenue in 1914 to be $156,000,000. With the single exception, and that exception 1913, the net revenues of these Western railroads were greater in 1914 than in any other year in their history. For fear the railroads will urge a different situation might result if you exclude the Union Pacific, Northern Pacific and Great Northern, we call attention to the fact that if you exclude those three railroads, the net revenue of the Northwestern Group amounted to $88,000,000 in 1914, which also (with only one exception) exceeded any other year since the first track was laid west of the Mis- sissippi river. Now turning to the Southwestern Group, we find the net revenue in 1914 to be $80,000,000, which, with only two exceptions, 1907 and 1913, was the greatest in their history, instead of being the lowest of any year since 1908. EUROPEAN WAR. As to the second basic factor presented at the rehear- ing of the Five Per Cent Case, the evidence offered at that hearing on behalf of the carriers and (quoting again from the decision of the Commission), "on behalf of the investment bankers who appeared at the hearing, that the war in Europe has created a condition which renders the diminution of the carriers' net income a menace to the 26 THE EVIDENCE prosperity of the country; that the war has placed an added strain upon the credit of carriers; that rates of interest will rise ; that a large volume of railroad securi- ties is held abroad; that the denial of the increase in freight rates would, in view of the diminished net income, be followed by a dumping of foreign securities upon the American markets; that our markets would not be able to absorb these securities — at least, without great fall in price ; that disaster would result not only to our railroads, but to_ insurance, banking and industrial concerns; and that for these and other reasons, extending far beyond the direct needs of the carriers themselves, we should now allow the proposed increase in rates. ' ' Id. 32 I. C. C. 329. As a result of this evidence which seemed to be per- suasive, the Commission reached the conclusion as fol- lows: "The conflict in Europe will doubtless create an unusual demand upon the world's loan fund of free capital, and may be expected to check the flow of for- eign investment funds to American railroads. It ap- pears that our railroads represent the bulk of Euro- pean investment in this country. The rate of inter- est — the hire of capital — has risen during the last decade, and may rise still further. ' ' Id. 32 I. C. C. 329. In addition to this the Commission also found as fol- lows: " Whatever the consequences of war may prove to be, we must recognize the fact that it exists, the fact that it is a calamity without precedent, and the fact that by it the commerce of the world has been dis- arranged and thrown into confusion." Id. 322, 1. C. C, 330. In striking contrast to the situation as portrayed by the bankers and railway officials who testified before this body, we now find that after almost a year's duration of the European war, money is a drug on the market ; that THE EVIDENCE 27 interest rates are lower than they were before the war; that American securities have not been dumped on Amer- ican markets, and as a culmination of it all, the Western railroads deliberately abandoned the war as any argu- ment or justification for an advance in freight rates. This remarkable sequel to the testimony of railway and banking officials is another great warning to this Commission against placing too much confidence in the claims of these gentlemen. You have had another great warning. You mention it in your decision when you state : "True, the representations of the carriers in the 1910 cases, that without the increases then sought their credit must totally vanish, proved strangely at variance with their subsequent experience in the borrowing of many hundreds of millions. " 32 I. C. C, 329. However, this time you saw fit to place reliance in their claims, for your very next sentence was: "But we do not doubt that the financial problems of the carriers have been made much more acute by reason of the war, and if we are to set rates that will afford reasonable remuneration to these carriers, we must give consideration to the increased hire of capi- tal as well as to other increased costs." 32 I. C. C, 330. Now listen to the testimony of one of the witnesses put on the stand in the Western Advance Kate Case, Mr. Pel- ton, the president of the Chicago Great Western Rail- road: "Mr. Thorne: Mr. Felton, can you name any in- creases in the cost of supplies of a substantial char- acter since the beginning of the European war af- fecting a large or substantial part of your operating expenses? "Mr. Felton: Since the commencement of the European war? "Mr. Thorne: Yes. 28 THE EVIDENCE "Mr. Felton: No, sir, I don't think there has been any increase. "Mr. Thorne: Any increase in wages of a sub- tial character? "Mr. Felton: There have been demands enough; they are not increased yet. (tr. 187.) Again, as to the war, listen to Mr. Felton's statements that remain unqualified by any other witness : "Mr. Thorne: Can you borrow money as cheap now as you could before the war commenced? 1 ' Mr. Felton : You can borrow money as cheap to- day for short terms, I should say, as you could be- fore the war commenced, but since the war we have paid as high, as I told you, as 7y 2 % for one year money. "Mr. Thorne: What month was that? "Mr. Felton: That was November. "Mr. Thorne: Can you name any other company in any other line of business in that month that was able to borrow at a cheaper rate than you? "Mr. Felton: No, I think not. I think higher rates than that were paid. (tr. 187.) After the first war scare was over interest rates be- gan to drop. Money in Europe or money that was ac- customed to seek the markets of Europe hunted oppor- tunities for investment in this country. Mr. Felton readily recalled an issue of securities by the North Western that sold at a rate of 5%. Those who have been following the money markets during the past few months know a large number of rail- road issues that have been made at less than 5%. Finally, in the cross-examination of Mr. Hopkins, Mr. Norton, attorney for the Santa Fe, objected to the wit- ness referring to the war, saying: "We have nothing on here as to the war. ' ' THE EVIDENCE 29 Then the record shows the following: "Mr. Thome: You do not place any reliance on the war as justifying your advance in the freight rates? "Mr. Norton: No, we have no figures which are affected by the war ; nobody knew June 30th, except the Kaiser and a few others, that there was going to be a war." (tr. 8139.) And in no part of their testimony do they rest upon the European war, as was done so eloquently and forci- bly by bankers, railroad presidents and railroad attor- neys in the East. Consequently we are relieved in the discussion of this case from the consideration of the effects of the Euro- pean war, which was the second important foundation for the supplemental opinion in the Eastern Advance Rate Case. INADEQUATE MAINTENANCE IN EAST. Another striking difference between the Eastern and Western situation is the following as to what the Com- mission found : "While there has been recently an enlarged ex- penditure for maintenance of equipment, it is clear that it has not been sufficient to restrict to proper limits the number of cars and locomotives needing repairs." 32 1. C. C, 328. Statements of a character similar to this have been printed in advertisements marked "paid advertise- ments," consisting of two or three columns in several hundred western newspapers. There are such things as admissions and statements made by parties to a case outside of the actual trial being admissible in a court room. They are frequently the most searching and telling criteria to test the credibility of a witness ; and there should be some degree of accountabil- ity developed as to these railroads and their agents, that 30 THE EVIDENCE will prevent them from indulging in wholesale false ad- vertisements and misrepresentations before the public, without there being any responsibility for the same as- sumed later before this tribunal. In making reference to this subject in this manner, we have one rather respect- able precedent for such action in 20 I. C. C. at page 318. There is no testimony in the record as to just how much does constitute a reasonable number of "bad or- der' ' cars. There will always be some bad order cars. It would be extravagant to maintain the whole property up to "condition new." On the other hand, it is possi- ble, as stated by the Commission in the Eastern Case, for the carriers to fail to have adequate money to maintain their properties in the manner in which they should be cared for. ADEQUATE MAINTENANCE IN WEST. Mr. C. C. Wright, chief counsel for the carriers in the West, removed this issue from the case by a concession of record that the Western railroads were able to main- tain their properties as they should be. (tr. 4663, 4664.) SELECTED LIST OF RAILROADS. The carriers in the present proceeding claim to try this case on the basis of the showing as to conditions as a whole. They have attempted to show these conditions in the entire Western territory, and second, in certain portions of that territory by certain groups of railroads. In the Eastern Case carriers include all the railroads serving the territory. In the present Western Case the exhibits offered by the railroads constitute a selected list of companies, leaving out four strong railroads, as well as a number of small ones that were specifically named in the Commission's Suspension Order. Two-thirds of the mileage of one of these railroads omitted is located in Kansas and Nebraska. Every car of grain and every THE EVIDENCE 31 car of live stock moving from practically every town lo- cated on this railroad will pay the advances involved in this case. SYSTEM FIGURES VERSUS SUBSIDIARY LINES. In the Eastern Case the railroads used system figures. In the statistics filed in this case by the carriers, they omit the Southern Pacific and include in lieu thereof, four of five subsidiaries, most of which made splendid deficits last year. The Southern Pacific is, as is known, one of the great railroad properties of the country. It is true it extends to California; but it is also true that the Santa Fe ex- tends to California, and they include the Santa Fe in their tabulation. The inclusion of a part of the strong lines and the exclusion of others that are equally strong or better, simply serve to reduce the general or consoli- dated average upon which such great reliance is placed. TERRITORY AND RAILROADS INVOLVED. There are two methods of analyzing the adequacy of railroads in any given territory. One is to select a few representative companies and make an analysis of their financial and physical conditions, considering them rep- resentative of the territory as a whole. The second method is to get a composite average of all the railroads serving a given territory. The first method named is the one adopted by the Com- mission in the three advanced rate cases of 1910, decided February 22, 1911. The second method is the one pur- sued by the Eastern railroads in the advanced rate case last year. The Eastern carriers were careful to conscien- tiously include all of the railroad systems serving the territory that had a substantial proportion of their mile- age in the territory. 32 THE EVIDENCE If you adopt the second method, the consolidated aver- age figure, it becomes all-important that you shall fairly include all classes of railroads that serve substantially the territory involved and that do not have the bulk of their traffic outside of that territory. A violation of that fundamental principle can produce all sorts of distorted results. The railroads are so inter- laced throughout different parts of the nation that if in any given territory you exclude strong lines having fifty or seventy-five per cent of their mileage in a territory, and include all weak lines having but ten or fifteen per cent and more of their mileage in the territory, you can produce one consolidated average. On the other hand, if you include all strong lines, even though they have only ten or fifteen per cent of their mileage in the territory, and exclude many of the weak lines, regardless of what proportion of their mileage and traffic is in the territory involved, you can produce a result precisely the opposite from the above. A selected list of railroads is worse than useless when you are trying to find the consolidated average, and are going to place any weight upon that figure as represen- tative of the adequacy of revenues as a whole in a given territory. It is worse than useless ; it is deceptive, mis- leading, untrue and unjust. This case does not concern only the rates on grain and live stock, when you are considering the adequacy of the revenues as a whole. In that event we are analyzing their financial conditions, the crystallization of all of their fi- nancial operations, including all their freight traffic and all their passenger traffic. "VVe must first consider the situation as a whole in a given territory; whether it is one state or five states or twenty states, the all-important thing is to take all of the railroads that can fairly be con- sidered representative and serving the territory involved. It would be entirely unfair to include a company having THE EVIDENCE 33 only ten per cent of its mileage in a given territory in any total which purports to show financial conditions as a result of the rates in that section. The financial condi- tion of such a railroad would reflect the adequacy of rates in the territory where ninety per cent of the mileage is located. For the foregoing reasons we must give very careful thought to the selection of the railroads that go into any composite figure. We should either take a few typical properties, or, if we take a composite average, we must include all the strong as well as all the weak ones. A composite average derived from a selected list does not reflect the conditions in a territory as a whole unless your selected list is truly representative. In his opening statement Mr. Wright said that they would offer statistics covering the territory as a whole, as distinguished from the weak lines or the strong lines. He stated they had pursued this policy in conformity with the suggestions of the Commission in other cases. Now let us see how that promise has been carried out. For several years it has been common knowledge that the Western railroads were going to ask for a general advance in their transportation charges. During the past two years this movement has been evidenced by many thousands of tariffs filed with the Interstate Commerce Commission proposing increases in classification ratings, rules, regulations, minimum weights, additional charges for various services, including refrigeration, stopping in transit, demurrage, and advances in specific rates, on scores of different articles. Finally on May 21, 1914, at a conference held in Chicago, the plans for a general movement for advanced rates were formulated. (Tom- linson, tr. 11520.) The carriers who were respondents in this case filed over 1,000 tariffs and supplements effective December 1, 1914, and shortly thereafter these were suspended by the 34 THE EVIDENCE Interstate Commerce Commission, and constitute the basis of the present proceedings, together with the tariffs suspended in 19 supplemental orders. Subsequently some of these tariffs were separated and given other numbers on the docket of the Commission. Other large and important advances made prior to that time, have also been suspended, and some of these are still pending before the Commission, presumably waiting the present investigations as to the revenues of the car- riers. Other substantial advances by these same car- riers, and other railroads serving the same territory, have been suspended and separate cases have been made of them. It is fair to consider this whole series of advances as a part of a general movement to increase the revenues of Western railroads. There will be no serious question of that fact by any person. These general advances in freight rates were followed by a proposed general ad- vance in passenger rates, throughout the same territory, and by the same railroads. The railroads named in the original suspension order of the Commission were 41 in number, as follows: 1. Atchison, Topeka & Santa Fe Eailway Co. 2. The Chicago & Alton Railroad Company. 3. Chicago & Eastern Illinois Railroad. 4. Chicago & North Western Railway Company. 5. Chicago, Burlington & Quincy Railroad Co. 6. Chicago, Great Western Railroad Co. 7. Chicago, Milwaukee & St. Paul Railway. 8. Chicago, Rock Island & Pacific Railway. 9. Chicago, St. Paul, Minneapolis & Omaha Ry. 10. Choctaw Railway & Lighting Company. 11. The Colorado & Southern Railway Company. 12. El Paso & Southwestern System. 13. Fort Smith & Western Railroad Co. THE EVIDENCE 35 14. Galveston, Houston & Henderson R. R. 15. Great Northern Railway Company. 16. Hillsboro & North Eastern Railway Company. 17. Illinois Central Railroad Company. 18. The Kansas City, Mexico & Orient Railroad Com- pany. 19. The Kansas City Southern Railway Co. 20. Midland Valley Railroad Co. 21. The Minneapolis & St. Louis Railroad Company. 22. Minneapolis, St. Paul & Sault Ste. Marie Ry. 23. Missouri & North Arkansas Railroad. 24. Missouri, Kansas & Texas Railway Company. 25. Missouri, Oklahoma & Gulf Railway Company. 26. The Missouri Pacific Railway Company. 27. St. Louis, Iron Mountain & Southern Railway Co. 28. Morgan's Louisiana & Texas Railroad & Steam- ship Co. 29. Louisiana Western Railroad Company. 30. Iberia & Vermillion Railroad Company. 31. Lake Charles & Northern Railroad Company. 32. Northern Pacific Railway Company. 33. Oregon Short Line R. R. Co. 34. St. Louis & San Francisco Railroad. 35. St. Louis, Rocky Mountain & Pacific Railway Company. 36. St. Louis Southwestern Railway Co. 37. The Texas & Pacific Railway Company. 38. The Trinity & Brazos Valley Railway Co. 39. Union Pacific Railroad Company. 40. The Wabash Railroad. 41. Wisconsin & Michigan Railway. Some of these are subsidiaries of others. The reason for arranging them in that manner was because Mr. Wettling did so as to his companies, whether parent or subsidiary, in the body of his exhibit where he lists his 41 railroads. This is a striking coincident when one 36 THE EVIDENCE finds that Mr. Wettling has added a large number of weak railroads, and omitted a number of strong lines embraced in the Commission's order. In addition to the foregoing railroads that were spe- cifically named, the original suspension order of the Com- mission also included a long list of tariffs issued by the Western Trunk Line Committee, the Trans-Missouri Committee and the Southwestern Committee. The sup- plemental orders of the Commission did not add any carriers of substantial importance serving this same ter- ritory, to any considerable extent. If a person took all the railroads named in the com- mittee tariffs which have been suspended by the Com- mission, he would undertake an analysis of several hun- dred properties, many of which are outside of the terri- tory involved. A railroad like the Illinois Central has over eighty per cent of its mileage on which there would not be one car of grain, live stock, packing house products, fruits and vegetables affected. The principal commodities involved in the present pro- ceeding are grain, live stock, packing house products, fresh meat, coal, fruits and vegetables, hay, straw, broom corn and cotton piece goods. The advances in grain rates are proposed from the great bulk of the stations in Kansas, Nebraska, Iowa, and several hundred stations in Minnesota, South Dakota and the southwestern states, to all of the principal markets in this portion of the United States, as well as for export ; also on the proportionals from the principal markets, including Chicago, St. Paul, Omaha and St. Louis, to every part of the United States, and for export. Ad- vances on live stock are proposed from the great bulk of the stations in the same territory. The territory to which each of the advances are applicable will be more THE EVIDENCE 37 definitely described in separate briefs, covering the va- rious commodities. The territory embraced in the proposed tariffs can be roughly described as Western Trunk Line, Trans-Mis- souri and Southwestern Committee territories, embrac- ing a portion of Illinois, Wisconsin, Minnesota, North Dakota, South Dakota, Iowa, Nebraska, Kansas, Mis- souri, Arkansas, Oklahoma, Louisiana, Texas, together with a portion of Colorado east of Denver. The territory, and the railroads involved, are practic- ally the same as those embraced in the two cases that were decided by the Interstate Commerce Commission February 22, 1911, known as the Western Advance Rate Case, and the one entitled Texas Railroad Commission v. Atchison, Topeka & Santa Fe Railway Co., et al., being reported in 20 I. C. C. 463-485. The Southwestern lines in the Texas Case included: Atchison, Topeka & Santa Fe ; Chicago, Rock Island & Gulf; Chicago, Rock Island & Pacific; Fort Worth & Rio Grande; Galveston, Houston & San Antonio; Gulf, Colorado & Santa Fe; Houston & Texas Central; International & Great Northern; Mis- souri, Kansas & Texas; St. Louis Southwestern; St. Louis, Iron Mountain & Southern ; Texas & Pacific. Referring to the foregoing list, the Commission stated : ' ■ Of the four trunk lines that are defendants, viz., the Missouri, Kansas & Texas, the Atchison, Topeka & Santa Fe, the Chicago, Rock Island & Pacific, and the St. Louis & San Francisco, it is believed that the Missouri, Kansas & Texas, from a traffic standpoint, is probably the most tvpical and representative." (Id. 20 I. C. C. 469.) It will be noted that the four trunk lines defendants in that proceeding are also respondents in the present case. It will further be observed that the list of railroads spe- cifically named by the Commission in the decision, are 38 THE EVIDENCE practically identical with the Southwestern lines respondents in the present proceeding. In addition to those specifically named, appearances are shown in that case for the Southern Pacific, the Missouri Pacific, and various other defendant companies. In our discussion of the issues in this case we will ob- serve the same division of companies and territories, as was adopted by the railroads and by the Interstate Com- merce Commission in 1910. There are certain fundamen- tal traffic conditions and financial considerations which justify the separation that was made. These are familiar to any person acquainted with transportation affairs in the West, and they are abundantly exemplified in the record in this case. Mr. Wettling's exhibit presents the figures for 41 sys- tems (so-called). Mr. Wright says that includes most of the principal lines throughout that territory served. The 41 railroads named and used by Mr. Wettling in his ex- hibit are as follows: Atchison, Topeka & Santa Fe. Chicago & Alton Chicago & North Western Chicago, St. Paul, Minneapolis & Omaha. Chicago, Burlington & Quincy. Quincy, Omaha & Kansas City. Chicago, Great Western. Chicago, Indiana & Southern. Chicago, Milwaukee & St. Paul. Chicago, Eock Island & Pacific. Colorado & Southern. Fort Worth & Denver City. Wichita Valley. Colorado Midland. Denver & Eio Grande. Fort Smith & Western. Illinois Central. THE EVIDENCE 39 International & Great Northern. Kansas City Southern. Louisiana & Arkansas. Minneapolis & St. Louis. Iowa Central. Minneapolis, St. Paul & Sault Ste. Marie. Wisconsin Central. Missouri & North Arkansas. Missouri, Kansas & Texas. Missouri, Oklahoma & Gulf. Missouri Pacific. St. Louis, Iron Mountain & Southern. New Orleans, Texas & Mexico. San Antonio & Aransas Pass. San Antonio, Uvalde & Gulf. St. Joseph & Grand Island. St. Louis & San Francisco. St. Louis Southwestern. Sunset Central Lines. Trinity & Brazos Valley. Texas & Pacific. Texas Mexican. Vicksburg, Shreveport & Pacific. Wabash. 40 THE EVIDENCE MR. WETTLING'S LIST OF RAILROADS HAS ALL THE ESSEN- TIALS OF A SELECTED LIST, AND CANNOT BE ACCEPTED EITHER AS COVERING THE SITUATION AS A WHOLE, OR AS CONTAINING THE REPRESENTATIVE RAILROADS SERV- ING THE TERRITORY INVOLVED. By strange coincidence, in the body of Mr. Wettling's exhibit he lists just 41 railroads, each one as an individual company, although several are subsidiaries; and at the same time we find in the original suspension order of the Commission just 41 railroads specifically named, several of them being also subsidiaries. He includes a large num- ber of railroads not named in the suspension order of the Commission and omits railroads that are specifically named in the original order of the Commission. The rail- roads Mr. Wettling omits are : Great Northern, Northern Pacific, Union Pacific, Oregon Short Line, El Paso & Southwestern, Fairmount & Veblin, Kansas City, Mexico & Orient, Midland Valley, Wisconsin & Michigan, St. Louis, Rocky Mountain & Pacific, Lake Charles & North- ern, Iberia & Vermillion, Galveston, Houston & Hender- son, Hillsboro & Northeastern, Choctaw Railway & Light- ing Co. Some of the foregoing were subsidiaries of those that were named in the Commission 's orders. Those that were not named in the Commission's orders and not subsid- iaries of those so named, and yet included in Mr. Wett- ling's list, are as follows: San Antonio, Uvalde & Gulf. San Antonio & Aransas Pass. International & Great Northern. Texas Mexican. THE EVIDENCE 41 Louisiana & Arkansas. Vicksburg, Shreveport & Pacific. The Chicago, Indiana & Southern, added by Mr. Wett- ling, while included in a supplementary order of the Com- mission, is not located in the Western District, nor is it a subsidiary of any line located in the Western District. In this list of railroads which Mr. Wettling omitted there are five strong properties. This selection of railroads is not excusable on the ground that he simply used intrastate roads which joined in these through rates. The same excuse would apply to every other intrastate railroad in the same territory. On that basis he left out over two hundred railroads that serve this same territory. These are named on pages 5 and 5-A of Chambers ' Exhibit 1. This selection is not justified on the ground that in order to include Texas railroads he had to take some in- trastate properties. As a matter of fact, the original sus- pension order includes 9 railroads that go into Texas, as follows : Atchison, Topeka & Santa Fe. Galveston, Houston & Henderson. Kansas City, Mexico & Orient. Kansas City Southern. Missouri, Kansas & Texas. Missouri, Oklahoma & Gulf. , k St. Louis Southwestern. Texas & Pacific. ► Trinity & Brazos Valley. 42 THE EVIDENCE The railroad companies used by Mr. Wettling in his exhibit, 41 in number, serve the following states that are located in Western Classification Territory : Louisiana Nebraska Arizona Arkansas North Dakota Utah Missouri South Dakota Idaho Iowa New Mexico Washington Minnesota Colorado Wisconsin Texas "Wyoming Part of Illinois Oklahoma Montana California Kansas In making the above statement, we have not considered system figures ; but we have used the so-called property investment figures used by Mr. Wettling, to determine the mileage covered by his exhibits. That mileage serves the territory we have described above. The railroads Mr. Wettling included earned upon the common stock during the fiscal year 1914, according to the preliminary abstract of the Interstate Commerce Commission, 3.08%. The roads Mr. Wettling left out serving the same territory, earned 8.61%. That shows again that Mr. Wettling 's is a selected list. If the railroads in Western Classification Territory de- sired to put over an advance, if they had the courage, they could leave out of their list all railroads proposing advances, all the strong properties and include all of the weak lines. The result when you compile a composite or average for the entire group would be extraordinarily low, and not representative of the character of the terri- tory. Certainly the Commission would not countenance such procedure as that. In order to test the adequacy of rates as a whole in any given territory, the Commission would surely include all of the railroads serving to a sub- stantial extent that territory, and not permit such an av- erage figure as would exclude strong lines, to be ac- THE EVIDENCE 43 cepted as a test. Yet that is precisely what these West- ern railroads have undertaken to put over at this time, so far as they dared to go in that direction. From the same territory as covered by his list, Mr. Wettling omitted two of the strongest roads in the North- west, the Great Northern and Northern Pacific, one of the strongest in the central portion, the Union Pacific, and one of the strongest in the South, the Southern Pa- cific — which latter serves the same territory as the Santa Fe. Mr. Wettling included subsidiaries of the Southern Pacific, but ignored system figures. In this proceeding the Interstate Commerce Commission has suspended several thousand advances that were proposed by the Great Northern and the Northern Pacific. The carriers claim that these companies, and the Union Pacific, will receive a very small amount of increased revenue because of the advances on the Union Pacific ; it being claimed that they will amount to $12,000 (tr. 14460-1-5) on the Great North- ern, and $19,000 (tr. 14806) on the Northern Pacific. The carriers have been required to file their division sheets. Let us consider the question on its merits. Advances in the grain rates are proposed from prac- tically every town in the states of Kansas and Nebraska, but because the Union Pacific does not go east of the Missouri River, the claim is made that it only shares in the advances to a small extent. Two-thirds of the mile- age of the Union Pacific is located in these two states. Advances are proposed on the other interstate railroads serving those states, and most of these are included in Mr. Wettling 's list. Why should not the Union Pacific be included? There are other advances it is proposing. The Union Pacific will profit by reason of the advances in passenger rates, to the extent of large sums of addi- tional revenue. It will also profit by the elimination of the concentration of poultry, butter and eggs; a privi- 44 THE EVIDENCE lege, when taken away, that will serve to advance freight rates. It will also profit by special charges for demur- rage, for stopping to finish loading live stock, by the elimination of the stoppage-in-transit privilege on agri- cultural implements. The Union Pacific is participating with all the rest of the western railroads in a general movement to increase their revenues. Mr. Hawley, who is secretary to Mr. Lane (the presi- dent of the Union Pacific Railroad) and is in the traffic department, representing the General Freight Agent, testified as follows: "Mr. Thome: What was your volume of grain traf- fic from Nebraska and Kansas ? "Mr. Hawley: I have no figures. "Mr. Thome: It is very large, is it not? "Mr. Hawley: Yes; grain is one of our leading commodities. "Mr. Thorne Two-thirds of the mileage of your railroad is located in Kansas and Nebraska, is it not, if you exclude your system? 1 ' Mr. Hawley : I would say so ; yes, sir. "Mr. Thorne: There are advances in the grain rates, whether you get any share of it or not, from every one of those stations, is there not ? "Mr. Hawley: There is. "Mr. Thorne: You also are participating in this general movement to increase your charges for spe- cial services, stoppage in transit, demurrage, etc., heater service and refrigeration? "Mr. Hawley: I have no definite knowledge to that effect. "Mr. Thorne: That is true, generally speaking, is it not? "Mr. Hawlev: Generaliv speaking I understand it is the entire West. (tr. 14475-6.) "Mr. Thorne : Mr. Wright, would you also care to produce the men that can tell us how much increased revenue there will be on the Oklahoma Gulf, the THE EVIDENCE 45 Northeastern Texas & Mexico, the San Antonio, Uvalda & Gulf, the Missouri, Oklahoma & Gulf, the Missouri & North Arkansas? (tr. 14477.) "Mr. Wright: I want to say to the Commission, as to the good faith in the selection of the roads, that it was made on account of this attack. I propose to give to the Commission as fully and fairly as I can what the situation is, so they may understand what the conditions are, and if there is any criticism in it I will take it, but that is the only reason and purpose for which I put this in, because of that objection and attack." (tr. 14477-8.) 46 THE EVIDENCE The accompanying map shows by dashed lines the lo- cation of the Great Northern, Northern Pacific and Union Pacific; while the solid lines indicate the location of the railroads serving the same territory, but included in Mr. Wettling's list of railroads. The Commission has separated the passenger rate case from the freight department of the investigation and yet the railroads are here trying to establish the inadequacy of revenues as a whole on the value of their property. This necessarily involves both the passenger and freight traffic. If the case had been consolidated, the Union Pa- cific would have been involved. It is not fair to take out a few of the strongest roads in the territory, eliminate them from your figures, and then prepare a consolidated average figure purporting to represent the revenues of all the railroads serving the territory as a whole. Even if they did not obtain a cent of additional revenue from this particular case; even if they absolutely refrained from filing a tariff or joining in any tariff proposing any advances, so as to be taken out of the case ; still this Com- mission should exclude such a railroad which has half or two-thirds of its mileage in the territory in any analysis of the financial and traffic conditions and adequacy of the rate structure in that section of the country; otherwise the large railroads will always keep out and let the weak properties prove up their case. Later, when conclusions are reached as to the adequacy of revenues as a whole in a given section, whether state, territory or district, and that issue is closed, then the larger lines can come in and profit by other advances, as these large companies are doing at this time. Attention is called to the fact that Mr. Wright was very much more enthusiastic about establishing addition- al revenues of the Union Pacific or Great Northern than on some of the Southwestern lines. Yet he includes the Southwestern lines and excludes the Great Northern. THE EVIDENCE 47 Some of these little roads have not over 200 miles of track. There is some confusion as to the precise boundary- lines of the Western Trunk Line territory, and whether the Great Northern, Northern Pacific and Union Pacific should be included in our table. The index of stations published by the Western Trunk Line Committee in- cludes no points in Kansas and Nebraska, and yet Mr. Spens admitted on the stand that certain traffic to and from points in Kansas and Nebraska was governed by the Western Trunk Line Committee, (tr. 14707; 14711-12.) Further, Mr. Condran testified in support of the same proposition, (tr. 13296-8; 13299-13301.) We also call your attention to the tariff publications of these committees. For instance, turning at random to Supplement 27, Freight Tariff No. 13-G, of the Western Trunk Lines, immediately below it are listed the railroads issuing the publication. Among these are the Great Northern and Northern Pacific Railways. If you will turn to Freight Tariff No. 18-H of Western Trunk Lines, you will find the issuing carriers are the Union Pacific, Northern Pacific and Great Northern. Turning to Supplement No. 42 to Circular I-J of Western Trunk Lines, you will find among the carriers stated on the cover page, as issuing the same, to be the Northern Pacific and Great Northern Railways. Freight Tariff No. 80-A, Western Trunk Lines, names the Northern Pacific and Great Northern. Freight Tariff No. 54 of Western Trunk Lines names the Northern Pacific, Union Pacific and Great Northern. Further we call your attention to the fact that all three of these railroads were specifically named as respondents in this case, in the suspension order made by the Inter- state Commerce Commission. Mr. Wettling, the principal witness for the carriers, 48 THE EVIDENCE when on the stand was asked to name the representative roads serving the states of Iowa, Minnesota, North Dako- ta, South Dakota and Nebraska, and he included in his list the Great Northern, Northern Pacific and Union Pacific, (tr. 8627.) Mr. Wettling has left out one of tne strongest proper- ties in the South — the Southern Pacific System; although he included some of the weak subsidiaries of this system that were earning deficits, leaving out the parent com- pany, which is one of the richest in the whole territory. It is true the system goes from Texas to California, but it is also true that the Santa Fe goes to California, and he included the Santa Fe System. Further, it will be noticed that one of the strongest roads in the central part of the territory, is the Union Pacific which Mr. Wettling care- fully omitted from his consolidated average ; that the two strongest lines in the northern part of the territory, the Northern Pacific and the Great Northern, were again carefully omitted from the list. The North Western is trying to profit in the same way as the Great Northern. If the North Western can in- clude in the list making up the average the extremely weak lines of the southwest, and exclude the exceedingly strong lines of the northwest, of course it would drive the average down that much, even though a lot of strong lines are left in the list. That method of proving the inadequacy of rates in a given territory, is shrewd, immensely shrewd; but pos- sibly shortsighted in its shrewdness. By the same course of procedure the Eastern railroad could have eliminated the Pennsylvania, the New York Central, and the Balti- more & Ohio from their averages. By the same course of procedure in the 1910 Advance Rate Case, the railroads could have eliminated the Burlington and the Santa Fe. At the beginning of the case Mr. Wright laid great stress on the proposition that they were going to consider THE EVIDENCE 49 the territory as a whole and not to pick out the weak or the strong; further, he said they had included in their figures all of the important lines in the territory ; the fol- lowing is his exact language : "We have selected the principal lines which con- stitute 41 lines and systems. The roads which we have selected embrace practically all of the mileage in that territory of any important lines. ' ' The carriers have failed to carry out that promise. In their consolidated figures offered by Mr. Wettling for the railroads as a whole, instead of covering all the rail- roads serving the particular territory described by Mr. Wettling, they have used a selected list; a selected list that is unjustifiably distorted, and presents results that are deceptive and misleading. For the foregoing reasons, in our tables and discus- sions we will seldom make reference to the list of rail- roads that Mr. Wettling selected. We prefer to use the list of railroads the Commission named in their suspen- sion orders. We find the railroads specifically named in the suspen- sion order of the Commission in this case to fairly repre- sent the territory sought to be covered. It will probably be conceded by all parties that the bulk of the advances lie in the following states : Minneso- ta, North Dakota, South Dakota, Nebraska, Iowa, Kan- sas, Oklahoma, Texas, Missouri, Arkansas and Louisiana. The Commission's original suspension order named 37 railroads, and four parts of railroads or subsidiary com- panies, making in all 41 railroads ; if you use that term in the same way that Mr. Wettling arrives at his 41 rail- roads. On page 1 of Vol. 1 of Wettling 's exhibits, he lists 36 railroads and 28 subsidiaries. Turning to any page of his summaries which purport to cover the 41 railroads — 50 THE EVIDENCE for instance, page 11 — you will readily see what we state is correct. It will be noticed that he considers the fol- lowing as distinct railroads, and among his 41, without any indication of their being subsidiary, and without any attempt to compile a system figure : Roads included in Wettling list of 41 which are sub- sidiary lines: Quincy, Omaha & Kansas City, subsidiary of C, B. & Q. ; Fort Worth and Denver City, subsidiary of Colo. Southern ; Wichita Valley, subsidiary of Colo. Southern ; Iowa Central, subsidiary of M. & St. L. ; Wisconsin Cen- tral, subsidiary of M., St. P. & S. S. M. ; St. Louis, Iron Mountain & Southern, subsidiary of Missouri Pac. ; New Orleans, Texas & Mexico, subsidiary of St. L. & San Fran.; St. Joseph & Grand Island, subsidiary of Union Pac; Sunset Central Lines, subsidiaries of Southern Pac. ; Trinity & Brazos Valley, subsidiary of C, R. I. & P. and Colo. Southern. The Commission's list of railroads includes every in- terstate railroad serving what we have described as the Northwestern territory (north of Kansas and Missouri) except two properties of insignificant character, as fol- lows : The Duluth, South Shore & Atlantic (which is in the northern part of Michigan and entirely outside of the Northwestern territory as previously described) ; and the Kansas City, Clinton & Springfield (an unimportant short line of railroad independent of any system in the case, having 162 miles, practically an intrastate road in Missouri, a railroad that has not filed any tariffs that have been suspended in this case). Further, the Commission's list in its original suspen- sion order includes all interstate railroads serving the Southwestern territory, with only exceptions as follows : Louisiana & Northwest, Louisiana & Arkansas, and Ar- kansas, Louisiana & Gulf. They are unimportant, inde- pendent short lines of railroad in Louisiana and Arkan- THE EVIDENCE 51 sas, scarcely more than logging roads, and have filed no tariffs that have been suspended in this case. (tr. 13139.) The bulk of advances involved in the case are located in the states above named, which comprise what is known as Western Trunk Line, Trans-Missouri and Southwest- ern Committee territories. The tariff publications of all three of these committees are embraced also in the suspension order of the Commission. For these reasons we use the Interstate Commerce Commission list of rail- roads. The territory involved falls naturally into two groups, the railroads operating in the territory north of the line between Nebraska and Kansas and between Iowa and Missouri. With only one or two exceptions, the same carriers have but little mileage, common to both terri- tories. There is just as distinct a demarkation, if not more so, in this respect with regard to the territory here under consideration, as that which exists between the Eastern and Southern districts, as classified by the Inter- state Commerce Commission, lying east of the Missis- sippi River. In our subsequent discussion, we will refer to three groups, first, the Northwestern group, which includes all railroads embraced in the suspension order of the Com- mission that serve the territory above described, north of the line between Nebraska and Kansas, etc., and ex- cluding only those lines, two-thirds or more of whose mileage lies outside of the territory described. We have included, in what we shall call the Southwestern group, all the railroads serving the territory south of the line above referred to, and embraced in the Commission's sus- pension order, excluding only those having two-thirds of their mileage outside of the said territory. The relative size of these territories is indicated by the accompanying map. 52 THE EVIDENCE A fact, worthy of mention at this time, is in re- gard to the Illinois Central. This property falls in the Southern district, where it has been classified by the Interstate Commerce Commission. In the first place, THE EVIDENCE 63 it has only 16% of its mileage in this territory west of the Mississippi Eiver, if you consider the railway proper, and only 9% of its mileage if you consider the system as a whole. The Commission itself, as stated, classifies this road in another territory than the one we are considering. With 84 to 90% of its mileage outside of the territory, it is not fair to consider it a representative railroad in this section. In making our grouping of railroads we have studious- ly avoided any bias. We have sought to be absolutely fair, using not a selected list, but every railroad, whether weak or strong, rich or poor, that has at least one-third of its mileage within the territory. The Commission may decide that it is time for it to recognize differences in the territory, in the traffic, and in the financial conditions of the carriers throughout this great western two-thirds of the nation. You have already made a separation of the companies in the east. You divide one-third of the nation into two groups, and you leave the other two-thirds of the nation in one group or district. The differences in traffic con- ditions, and in the financial status of the western rail- roads have been established by this record, by the wit- nesses testifying on behalf of the public, as well as those representing the railway companies. This Commission itself has had occasion to make a separation of the Western railroads, and you have reach- ed different conclusions as to the financial needs of the Southwestern and Northwestern companies. In the case entitled Railroad Commission of Texas v. A.,T. & S. Fe, et al., 20 I. C. C. 463, the rates involved affected traffic to and from Texas, but you did not attempt to make any separation of that traffic for the purpose of analyzing the financial needs of the carriers. Instead of that, you made a comprehensive analysis of the adequacy of their rev- 54 THE EVIDENCE enues from their entire lines. The group of railroads covered by you in that case included the Atchison, Topeka & Santa Fe, Chicago, Rock Island & Pacific, Chicago, Rock Island & Gulf, Fort Worth & Rio Grand, Galveston, Harrisburg & San Antonio, Gulf, Colorado & Santa Fe, Houston & Texas Central, Missouri, Kansas & Texas, In- ternational & Great Northern, St. Louis Southwestern, St. Louis, Iron Mountain & Southern and Texas & Pacific in addition. While that list embraced practically all that you made mention of in the decision, yet it will be noted that the Missouri Pacific was also a party defendant, and was represented in the trial, as well as other companies. In discussing the railroads involved in the case, you stated the following : "Of the four trunk lines that are defendants, namely the Missouri, Kansas & Texas, the Atchison, Topeka & Santa Fe, the Chicago, Rock Island & Pacific and the St. Louis & San Francisco, it is be- lieved that the Missouri, Kansas & Texas from a traffic standpoint is probably the most typical and representative. ' ' You follow this with a somewhat elaborate analysis of the financial condition of the Missouri, Kansas & Texas. The foregoing list of railroads corresponds very closely to what we have described in this case as belonging to the Southwestern Group. It will be found that there are very substantial dif- ferences in the financial and operating conditions of the Northwestern and Southwestern railroads. NORTHWESTERN GROUP. On the same day that this Commission rendered its decision in the case of Texas Railroad Commission v. A., T. & S. Fe, et al., supra, you also rendered your decision in the case commonly known as the Western Advance Rate Case, this being February 22, 1911. THE EVIDENCE 55 In this case the carriers proposed general advances on commodity rates, principally between the Missouri River and Chicago, although there were advances from points west of the river. At the present time the railroads are proposing various ways of increasing their revenues throughout the territory, both east and west of the Mis- souri River. An advance in freight rates on grain and live stock will affect practically all the towns in Kansas and Nebraska. The advances on grain go clear up into northern Minnesota. Advances are also proposed on packing house products, mill products, fruits and vegetables, coal and broom corn. They reach up into North Dakota, South Dakota and as far south as Oklahoma and Texas, and to the Denver, Colorado, common point district. In addition to these specific rate advances, carriers are proposing the elimination of stoppage in transit privileges on agricultural implements, concentration of dairy food products, demurrage charges, and a wholesale advance in passenger rates throughout all this Western territory. Our original petition asks that all these matters be con- solidated, and an investigation as to the adequacy of the revenues as a whole be made, but because of the varying conditions surrounding the different propositions at stake, these cases have been separated to some extent. There are several ways of analyzing the adequacy of revenues. One is to select three or four typical, repre- sentative lines, and investigate them, somewhat exten- sively. That course was pursued quite generally in the 1910 cases. A second method is to take practically all of the carriers serving a given territory and arrive at a con- solidated average. In either event, the selection of your roads becomes of paramount importance, and will con- trol the conclusions that you may reach. In every terri- tory, and in every industry, there are weak roads and 56 THE EVIDENCE strong roads. At the very outset, the greatest of caution and deliberation should be taken ; if you select weak roads you can prove one thing; if you select strong roads you can prove another. This becomes of especial importance also when you adopt a so-called consolidated figure, representing the conditions in a certain territory as a whole. In any given territory only 10 or 15% of the mileage of some roads ex- ists. If you include such companies as that, you are test- ing the adequacy of revenues in another portion of the nation where 85% of their traffic lies. On the other hand, if by some device or other you can arrange to eliminate a few of your strong roads in any given terri- tory, although you may keep in the rest of your strong roads, you will reduce your average figure by that amount- Another complication comes in the amount of terri- tory that has to be considered. The Supreme Court has found it possible to consider individual roads in a given state; further to consider the state as a whole, and analyze the adequacy of revenues in that section of the country. These great western states are as large as many of the European nations. If the Supreme Court can find it advisable to perform that task, this Com- mission can. Because rates are inadequate in Arizona is no sign that they are inadequate in Illinois. It is much easier to analyze conditions where a certain group of railroads handles the bulk of the traffic and the bulk of the mileage of the said railroads is located in that territory. That has been the occasion for the grouping of companies into different territories by this Commission in the past. It must be remembered that Western Classification Territory is twice as large as the Central Freight Asso- ciation, New England, Eastern Trunk Line and the Southern Districts all put together. THE EVIDENCE 67 In adopting some divisional line, many things must be considered. One important effort should be to make the grouping fairly represent the territory. Sixteen per cent of the mileage of the Illinois Central Railroad is located west of the Mississippi River. Not a car of grain or live stock, or packing house products, fruits and vege- tables, moving on 80% of the mileage of the Illinois Cen- tral system will be affected by the advances proposed in this case. Thirty per cent of the mileage of the Wabash is lo- cated west of the Mississippi River. The same comment is applicable to that company. The territory directly concerned in this case covers the following eleven states : Minnesota Kansas Iowa Missouri North Dakota Arkansas South Dakota Louisiana Nebraska Oklahoma Texas This territory very naturally divides itself into two groups. We will call one the Northwestern Territory, the other the Southwestern Territory. There are several -rea- sons why one group is quite distinct from the other. The great bulk of the mileage of the Chicago, Burlington & Quincy, Chicago & North Western, Chicago, Milwaukee & St. Paul, Great Northern, Union Pacific, Northern Pacific, Minneapolis & St. Louis, Soo Line, Iowa Cen- tral, Chicago, Great Western, is located in the North- western group. On the other hand, the great bulk of the mileage of the St. Louis & San Francisco, Missouri Pacific, Atchison, Topeka & Santa Fe, Chicago, Rock Island & Pacific, St. Joseph & Grand Island, St. Louis, Iron Mountain & Southern, Kansas City, Mexico & Ori- ent, Galveston, Houston & Henderson, Ft. Worth & Den- ver City, Trinity & Brazos Valley, St. Louis, El Reno 58 THE EVIDENCE & Western, Ft. Smith & Western, Missouri & North Arkansas, Missouri, Oklahoma & Gulf, Midland Valley, Lake Charles & Northern, Iberia & Vermillion, Louisiana Western, Morgan's Louisiana & Texas, St. Louis South Western, Kansas City Southern, Texas & Pacific, Mis- souri, Kansas & Texas, is located south of the line divid- ing Kansas from Nebraska. The only railroad that overlaps to any extent in the two territories is the Rock Island, but practically two- thirds of its mileage is south of the line we have indicated. Another very important fact is that the Rock Island was in a very prosperous condition until it began building and reaching out into the Southwest. It is either that fact or its contact with the Moores and Reeds (and more prob- ably both) that has produced the present condition of the Rock Island. There are four reasons why the Rock Island belongs fairly to the Southwestern group. First: The bulk of its mileage and traffic is in the Southwestern territory as described above. Second: As long as its mileage was confined to the Northwest the prosperity and financial condition of the company was analogous to the representative lines of the Northwest, and there is apparently no reason today why it should not be on the same plane, because it has a very large tonnage in that territory, reaches large terminals, has main lines and feeders. Third : Mr. Wettling, who was the chief witness for the railway companies in this case, classified the Rock Island as a Southwestern line, making the statement as follows: "Mr. Thorne: Now, considering the territory south of the line (tr. 4070) we have been discussing; what would you say were the four representative rail- roads serving that territory? "Mr. Wettling: The Santa Fe, the Rock Island, the Missouri, Kansas & Texas, and in the extreme THE EVIDENCE 59 south the Sunset Central Lines. The Frisco is an- other that I really ought to include with the group. 1 ' Commissioner Daniels : Would you omit the Mis- souri Pacific f "Mr. Wettling: I do not like to omit the Missouri Pacific, but I was calling the largest of the systems. "Mr. Thome: Again, what would you say would be the four representative lines in that territory? "Mr. Wright: Do you mean the biggest mileage, or what do you mean f "Mr. Thome: No. 1 ' Mr. Wright : You can make them representative in several ways. That is the difficulty. "Mr. Wettling: The Santa Fe, I should say, would be probably named first. I think the Rock Island is a representative line through the territory in the south and west of here, and has the largest percent- age of its mileage south of the line named. The Mis- souri Pacific with the Iron Mountain would probably be more representative than the Missouri, Kansas & Texas alone." (tr. 4071.) It is interesting to note that Mr. Wettling 's selection of the representative Southwestern lines corresponds pre- cisely, with one exception, with the selection made by the Interstate Commerce Commission of the Southwestern line in the case of Railroad Commission of Texas v. A., T. & S. Fe, et ah, 20 I. C. C. 463. The exception referred to is that the Commission named the St. Louis & San Francisco instead of the Missouri Pacific, named by Mr. Wettling. Fourth : Mr. Millard, witness offered by the Interstate Commerce Commission, classified the Rock Island as a representative Southwestern line, and used the North Western road as a representative Northwestern line. "The North Western and Rock Island furnished the most elaborate scheme of traffic statistics. On no other railroads could I find the number of merchan- dise cars, with the exception of the Santa Fe, and their traffic statistics are not compiled on the same basis as these others. I chose the Rock Island be- 60 THE EVIDENCE cause it was a Southwestern road, and the North Western because it served the Western Trunk Line territory." (tr. 12957.) JUSTIFICATION FOR DIVISION OF THE SOUTHWESTERN AND NORTHWESTERN GROUPS. First: The Commission itself made a similar division, or grouping, of these railroads in 1910. Second: The traffic conditions justify the separation. Illustrating this fact concretely, we cite the following from the testimony of Mr. Schaff, President of the Mis- souri, Kansas & Texas : ''There are special difficulties attached to railway operations in the Southwest which perhaps are not encountered in other sections of the country. The territory is largely dependent upon agriculture, cattle raising and similar pursuits, and is therefore subject to crop failures which naturally result in depressing trade. Outside of St. Louis and Kansas City, there are no large industrial and manufacturing centers to produce any considerable heavy moving throughout the year. The business is generally seasonable, and it is necessary to provide facilities during four or five months of the year, which must lie idle or nearly so during the remaining months. "Generally speaking, the movement of traffic is largely one direction, which results in a large empty car mileage in the opposite direction. "It has been difficult to increase either the average train load or carload even with the use of heavier capacity engines and rolling stock. "A great deal of the territory is subject to floods, and much of it is semi-arid and subject to droughts." (tr. 49-50.) Third : The financial condition of the carriers differs greatly. A few facts illustrating the somewhat remarkable dif- ferences in the financial condition of the carriers in the Northwest and the Southwest justifying the considera- tion of these territories separately will be here presented. THE EVIDENCE 61 o GO 0) - as as cs O a - GO s p o a E a> GO J £ I 1 e o CO & 9 P U a 9 as •• co &c -a J -tj > 03 O 0> — OOnjen dS ■ 2«£ O 3 1 S «-Oen "S u - .2 a!o ■30 g •a fc £ t- M 3 3 0) OtOc loeaooo • ■*©© Ht-O* -tHCMCM COencn© -t-CMO en cocoes 'eeee*i-? ene^oo© ,^ian OOOSOO .COM'* ©eocNTio 'nVo »H O • M T ■ co ^r • en © ' t- o " CM -W J i-i f. • © 1-4 • fH • *♦■ •»■ • eo •© -en co -o -cm t- •© •■» •4 '©"■ ;»* i - ■ — -^ oo ;ao .5 ia H H i-^ M tH M in H oo o en CO o OS «»■ V* ■*©e\ieeen©t-©Tt«i3eoinoocn'»"* , eouseMcn ooi- o©i-(CNj©ooiacnio'«'r-it-cMia oot— i-c"»«eo©eoi-ieMvco©©eO'»»HtOt"CS* i-( cm oo'ih ©" en Vco e*ust-i-ceot-eocout©©t-icoaienooc-t-oo iHioenoo©©eNi».ot-co leOrHSMt-OOC-COCqccrt-OOCMt-'^eMt-mCM >c-*roo'*!"eowoot-oot-CM©ft-eMcM©en©rHt.eNicneNioo© enm ©rH i-ic»eoc»©N©©©05'*iOTrt-©eNit-coeNi eMen©©t-eo©t-oocot-eooONiHenineo© i-iiH©enoo©[-ioeMc-ent-© eqco iH QQ Q QQ QQ or - I E 5 Is P. ♦JaJ _C0 « u C - v, c > o c c2 M fl flO nco-°3 * * E », ^1 cd»^ Hi erj 3 h-X hj ila o X al 62 THE EVIDENCE 1 s — . > b - ■=-= = •OT© •exo •oooo ,'cTcc© .▼MO .MNO if :~ ■ r =~ — - - O 3 -- - - - = OiiMCCNrcN -ec X — Si L= t- t- C5 pi C* ',-1 oc sc « ia pi oc i-( pi eo ■ ociat-io eoo th . CO n- OC pi «H CD eopneoiot-cTeJ cuo-vexi ea"* 1 WXCCOp*NH irTaeac'p-rir'coc'oooi' r- _- -r = -r r : - ^: Zx. z 2 222 3 . X 1* I ° -'- = O 3CxU - !xS x = 2— * r its® = ^ = = - = ■=- "-- . _ := : r •/. = - - . . = = - - - ---- '--j- a ■== *i E"i x -_• c M . eo a> JS.CC ;._ : c « '- i =>» " - - - -~ - -5=r w gg '-' S £►> °? •- - -;- - u — o E ° u 3 ..eu II 5- THE EVIDENCE 63 The total accumulated surplus for the Northwestern group aggregated last year $405,000,000, while the total for the Southwestern group aggregated $40,000,000. The total for all of the railroads named in the Commission's order, exclusive of our Northwestern group, showed an accumulated surplus last year amounting to $53,000,000, compared with $405,000,000 for the Northwestern group, alone. The dividends paid by the Northwestern group amounted to $101,279,621, while all of the rest of the rail- roads named in the Commission's Suspension Order paid dividends amounting to $39,688,104. The average rate of net operating income on property investment in the Northwestern group amounted to 5.40% in 1914; in the Southwestern group it was 3.8%. (Com- piled from Powell No. 2.) If you exclude from the Northwestern group the Union Pacific, Great Northern and Northern Pacific, the aver- age as shown by their surface figures in the Northwest- ern group without any analysis or alterating was 5.07%. If the Southwestern railroads had earned that much on their property, they would have increased their net operating income by $26,000,000. In other words, the Southwest- ern lines would have secured over twice the amount of additional revenue that all the railroads put together are asking for in this case, according to the claims of the car- riers. The Southwestern lines earned on their capital stock outstanding last year 2.57%, while the Northwestern group earned 8.39%. Excluding the Great Northern, Northern Pacific and Union Pacific, the Northwestern group earned 7.59%. In 1913, the Northwestern group, excluding the Union Pacific, Northern Pacific and Great Northern, earned on 64 THE EVIDENCE their capital stock 9.25%, while the Southwestern group earned 3.40%. While these facts demonstrate a very great difference in the financial conditions of the Northwestern and South- western railroads, yet we do not attempt to say that there is any proof here that the Southwestern lines have proved their case. Such a conclusion should not be reached with- out a more thorough investigation than we have been able to give. We have only stated the surface figures with- out any critical analysis for those roads. There are strong reasons why the state of Kansas should be included with the Northwestern group of states, instead of with the Southwestern group. Her produc- tion of grain and her farming are very analogous to the state of Nebraska. We hardly think, however, that the cross country check extends up and down for a distance of 400 or 500 miles ; in fact, advances in grain rates have occasionally been made in smaller territories than that. If it were not for the fact that Kansas is served by rail- roads that do not go up into the Northwestern territory at all, or practically not at all, such as the Missouri Pa- cific, Frisco, Missouri, Kansas & Texas and St. Louis Southwestern, it would be well to place Kan- sas in the Northwestern group. We have made some analysis of conditions, including Kansas and Missouri as a part of the Western Trunk Line terri- tory in the Northwestern group, but if those two states are added, you will include territory that is served by mileage of the weaker Southwestern railroads, like those we have named. A very natural boundary line lies between the states of Missouri and Iowa, Kansas and Ne- braska; yet there is strong reason why Missouri and Kansas should be included in the Northwestern group. For that reason we present alternating figures frequent- ly. There is no question whatever but what the North- western group of railroads belongs in an entirely differ- THE EVIDENCE 65 ent group from the Southwestern railroads. There are many reasons why the state of Kansas should be included in the Northwestern group. CONDITIONS IN THE SOUTHWEST. In addition to the foregoing extract from the testimony of Mr. Schaff, it may be stated in regard to conditions in the Southwest, that the companies seem to have been or- ganized by a different group of financiers, and while their apparent returns may be small, it is very probable that if a proper investigation were made into their traffic con- ditions, and into the value of their properties, the result would be different. Many miles of new railroads have been built through- out the southwest by private capital donated to the car- riers in the form of special taxes and subsidies, and by exemption from taxation. In the state of Louisiana, the Constitution of 1898 exempted railroads built prior to January 1, 1904, from taxation for a period of ten years. By an amendment to the Constitution in 1904, this exemp- tion was extended for a period of ten years to all new lines of railroads built from January 1, 1904, to January 1, 1910, so that it will be 1920 before all of the new lines of railroads in the state of Louisiana built prior to 1910 will begin to pay taxes. Of course, from year to year, some of this mileage is removed from the exemption period. In the period from 1898 to 1910 there were built in the state of Louisiana 2,756 miles of new railroad, which paid, or will pay, no taxes for a period of ten years. Much of this new mile- age received subsidies from the towns, cities and parishes (counties), through which the railroad was built. In ad- dition to this, the railroads have paid out of their earn- ings for much of the new mileage built in the state of Louisiana in the period of ten years. This is especially true of the Texas & Pacific and the Southern Pacific 66 THE EVIDENCE lines. Other states in the Southwest have had the same experience. The present value of railroads may appear greater than the public expected, but the public itself has put its money into these railroads and built itself much of the new mileage in the manner indicated. Our Committee would have liked to make a careful analysis of the Southwestern lines, but time absolutely prevented. We have undertaken to cover the Northwestern group of railroads somewhat extensively, and have presented to you the surface figures for the Southwestern railroads without adequate check or analysis. We have under- taken to give somewhat greater consideration to the Santa Fe and one or two other representative lines in the southwest than to the other lines as a whole in that terri- tory. The record shows that while some of these companies have not been taken care of adequately in the past, that they are reaching a better plane in recent years. The following extract from the testimony of Mr. Bush illus- trates this situation. Mr. Bush candidly admitted that his railroad was bet- ter, both physically and financially, than in 1910, as shown by the following: "Mr. Thorne: What was the year you were over the road prior to your becoming president! "Mr. Bush: I should think about — it might have been in 1909 I went through to the coast and went over the Missouri Pacific. 1 ' Mr. Thorne : Would you state to the Commission the character of the road at that time so far as road- bed and equipment are concerned? "Mr. Bush: It was in, you might say, poor con- dition, especially the roadbed. It had a great deal of light rail and very little ballast, and it was not anywhere normal, you know; it would not be what THE EVIDENCE 67 you would call anywhere near standard track. I could not speak as to the equipment; I did not ob- serve it closely. 1 * Mr. Thome : What was the cause of the condi- tion which you describe? Was it delayed mainten- ance? "Mr. Bush: Yes, it was delayed and deferred maintenance. They had not applied the heavy rail, and they were deficient in ties and ballast. "Mr. Thome: Would you describe the condition of that property as it is now, generally? "Mr. Bush : Well, on what you call the main lines of the Missouri Pacific the 85-pound rail is the stand- ard. The rail we are laying now is 90-pound and I think all of the main lines have had at least six inches or more of ballast applied, and the banks have been widened on what we call our main lines and our sec- ondary lines. "Mr. Thome: What is your judgment as to whether you are keeping the equipment up better than it was in 1910, before you became president? "Mr. Bush: Oh, well, I would have to keep it up better than it was kept up at that time or else I would not have it in service. "Mr. Thorne: As a matter of fact you are, are you not? "Mr. Bush: Oh, yes, sir; spending, I suppose, a million dollars a year more on maintenance of equip- ment than we were at that time. (tr. 447-8-9.) "Mr. Thorne : Just frankly now, is it a fair state- ment to say that in 1914 and recently you are main- taining the Missouri Pacific at a higher standard than in 1910 and those years ? "Mr. Bush: That is correct. "Mr. Thorne: In regard to the improving and the additions to your ballast, about how many years, in your judgment, or do you know, perhaps you do not know, the number of years they deferred the placing of new ballast and reballasting with rock or gravel back of 1910? "Mr. Bush: I could not say as to that. I do not think there ever was a regular ballast program on 68 THE EVIDENCE the Missouri Pacific up to the time I came there. 1 ' Mr. Thorne : Probably delayed several years f "Mr. Bush: Well, I think they tried to keep the road going, that was the amount of it. I do not think they had a regular laid out plan of improvement or betterment. 1 * Mr. Thorne : Is it not true that has had a great deal to do with the Missouri Pacific's lack of success? 1 * Mr. Bush : Well, I presume it has. ' * Mr. Thorne : You have inaugurated a new policy in handling that property, in trying to build it up into a more efficient property? "Mr. Bush: Well, I am certainly trying to get a road there that will meet the requirements of the shippers. "Mr. Thorne: Do you know what the gross earn- ings of your property were in 1910 ! "Mr. Bush: $53,000,000. "Mr. Thorne: What were they in 1914? "Mr. Bush: $59,000,000. "Mr. Thorne : An increase of about how much? "Mr. Bush: About $7,000,000. 1 ' Mr. Thorne : What was the net in 1910 ? "Mr. Bush: $15,000,000. 1 * Mr. Thorne : What is the net operating revenue for 1914? "Mr. Bush: $16,457,000. "Mr. Thorne: So that, in spite of maintaining your property at a higher standard, you have also had a million and a half greater net earnings ? "Mr. Bush: Yes, sir." (tr. 454-5). AMOUNT INVOLVED. The representatives of the carriers claim that the pres- ent advances only aggregate $10,000,000 (tr. 10). Fur- ther the counsel for the carriers state that the movement has been practically completed. As to this fact, the fol- lowing was stated of record : "Mr. Walter: Can you tell us whether all the THE EVIDENCE 69 tariffs have now been filed that are a part of this general western advance? I do not mean the case here, but initiated at the same time as the tariffs un- der suspension in this case. "Mr. Haile: Why, in the Southwest, I think, yes. I am not prepared to answer as to the Northwest, where our interest is little or nothing. "Mr. Wright: I think they practically are, Mr. Walter. ' ' Mr. Walter : Can you state that formally on the record, Mr. Wright? "Mr. Wright: Yes; they have been practically, except there may be some minor readjustments." (tr. 5833.) Mr. Wright was asked to produce the witnesses who made these computations. They were never produced. It was promised repeatedly that Mr. Boyd would later take the stand and prove up the details. He never did so. In this connection it may be well to note that the total freight revenues of the carriers, respondents in this case, aggregated last year approximately $700,000,000. But let us accept Mr. Wright 's statement as absolutely accurate; then we find the advances here proposed amount to approximately V/2% of their freight rev- enue. They proposed to secure $10,000,000 annually by making advances several times as great on certain select- ed commodities in certain selected sections of the ter- ritories served by these railroads ; the great bulk of the advances being specifically limited to that territory between the Missouri River and Chicago ; it being claimed by the carriers that no line operating west of the Missou- ri River secures any substantial division in the earnings, thereby throwing the burden of the advance on the traffic east of the Missouri River. The carriers propose advances ranging from 7% upward on different articles. If it be true that these carriers are in need of additional revenue, what justification have they for crowding it all on this selected part of their traffic. This action 70 THE EVIDENCE cannot be justified in reason unless that traffic is not bearing its fair share of the transportation burden. Had the advances been spread out over 50% of the traffic as in the Southwestern Case of 1910 (Texas R. R. Commis- sion v. A., T. & S. F., 20 I. C. C. 463), there would have been more justification for the action, but when an advance of Xy^fo is proposed, and some people are compelled to pay an advance several times that amount, we are justified in demanding facts to support such discriminatory action. Advances proposed in the East- ern case and Southwestern Cases of 1910, and the advances proposed in the Eastern Case of 1914 were more general in character. If what the railroads here claim be true, that accentuates the necessity for a justification or reason for the particular selection which the carriers have adopted. A request at the hands of this Commission for $10,- 000,000 from carriers whose gross earnings last year were $700,000,000, is not a legitimate request. Net rev- enues have fluctuated much more than that from year to year in this territory. There are no just grounds for concluding that their net income will not continue to do this in the future as it has in the past. For instance, in the Southwestern and Northwestern groups combined in 1898, in that one year there was an increase of over $24,- 000,000, both in net operating income and net corporate income. Again in 1901, there was an increase of $14,- 000,000 in net operating income and $7,000,000 in net corporate income. In 1906, there was an increase over the preceding year of $26,000,000 in net operating income and $27,000,000 in net corporate income. In 1907 there was an increase in net operating income of $20,000,000 and $26,000,000 in net corporate income. In 1913 there was an increase in net operating income of $45,000,000 over the preceding year, and in the net corporate income, of $40,000,000. THE EVIDENCE 71 It is very apparent that a mere $10,000,000 increase for one year can easily be anticipated. We must not presume that similar developments shall not occur in the future as have in the past. It is not for $10,000,000 that Mr. Wright and his asso- ciates are making this contest. These companies are seeking an advance in their passenger fares that will probably approximate 20% if they are successful in forcing it through on state and interstate business. To lay a foundation on that basis, they seek to prove inadequacy of revenues as a whole. The passenger rev- enues last year were approximately $244,000,000. A 20% increase (assuming two-fifths will travel on mileage books) will yield $48,800,000. In addition to these we have increases being proposed daily by the carriers. There is now pending before the Commission an advance, from the far northwest, on live stock which has been pending for over one year. Other advances on concentration of dairy food products, elimination of certain privileges, stoppage in transit, and charges for demurrage services, etc. All of these will bring more revenues to the carriers. If what these railroad companies are really seeking is an additional $50,000,000 in their net income, if they are successful and that $50,000,000 is divided between the Northwestern and Southwestern lines, in proportion to their present net corporate income, it will make this Northwestern group of railroads earn over 10% on their capital. The market prices of their bonds are today close to par. The market prices of their stocks, in that event, will soar higher than they are today; instead of averaging 125, as they do today, they will be much above 150. 72 THE EVIDENCE COST OF RAILWAY SUPPLIES. In the 1910 Advanced Rate Case, the Commission found, concerning the cost of railway supplies, as follows : * ' It was assumed at the initial stage of this investi- gation that railroad materials and supplies had greatly advanced in price within the past few years. Investigation was accordingly had into this ques- tion, and to our surprise, it may be said, it was dis- covered through figures furnished by the carriers and their admissions that, with the exception of fuel and ties, railway supplies and materials are today costing the carriers less on the average than in any of the past ten years." (Western Advanced Rate Case, 20 I. C. C, 367, 368.) "As to the increased cost in ties, while the stand- ard white oak tie costs 5 or 10 cents more, the gen- eral increase in this expenditure is almost negligible, it being estimated from the reports furnished by the carriers that it will increase the cost of maintenance less than $50 per mile of road per year." (Id. 369.) The analysis of cost of supplies made in this case dem- onstrates the same tendencies that the Commission found existing in 1910. Steel rails is the most important item, and, as all know, and the record shows, these prices have remained prac- tically constant for many years. Further, we all know, and the exhibits in this case show, that the density of traffic has increased enormously during recent years compared with previous times. Conse- quently the cost of rails per ton mile has shown a sub- stantial decline. Next in importance to steel rails, are iron and steel products. The Wall Street Journal is responsible for the statement that thirty per cent of the iron and steel prod- ucts of the country are consumed by the railroads. (Wall THE EVIDENCE 73 Street Journal, January 26, 1914, p. 7, Ellis Exhibit No. 1, P. 3.) There is a constant fluctuation frdm year to year in the prices of supplies. This is especially noticeable with reference to iron and steel products. In June of 1913, people would have been led to believe, as did the Secre- tary of the Iron Institute, that prices were going up; 74 THE EVIDENCE but future events demonstrated that that was purely a temporary phase of the situation. The steady downward trend on the principal iron and steel products, since 1900, is demonstrated by the accompanying chart, which covers steel bars, steel rails, Bessemer ingots, Bessemer pig, local No. 2 foundry, southern No. 2 foundry, basic pig, steel tank and wire nails. The Norton chart, being the last page of Norton Ex- hibit No. 1, includes a miscellaneous list of railway sup- plies. This chart does not show the downward trend that has occurred on iron and steel products ; but it indicates an advance on railway supplies up to 1907. Since then, however, there has been a decline, with fluctuations, on average prices, 1914 being at the lowest plane since 1907. This chart given in the exhibit, covers the prices on the following supplies : augers, axes, bar iron, barb wire, butts, chisels, ingot, copper sheet, copper wire, door knobs, files, hammers, lead pig, lead pipe, locks, nails, pig iron, planes, quicksilver, crosscut saws, hand saws, shovels, steel billets, rails, tin pig, wood screws, zinc sheet, etc. The cost of ties, untreated, has probably risen in price. However, the carriers are putting in a great many more treated ties in recent years than during the earlier period. It is estimated that these ties will be much longer lived than the old wooden ties. It is difficult as yet, many en- gineers state, to determine how much additional life these ties will have. The life of a tie is variously esti- mated by American railways from 7 to 12 years. It has been stated that beech ties impregnated with 12 pounds of oil per cu. ft. have lasted 30 years on the Eastern rail- ways of France. The French State Eailway states the life of creosoted ties to be from 15 to 30 years. It is said that in the bridge of L. & N. E. E., over the mouth of the Pasagoula river, there are piles which have been treated with 20 lbs. of oil per cu. ft., which have been in THE EVIDENCE 75 the structure for 28 years, and will be good for many- years to come. Uncreosoted piles V/2 ft. in diameter, in this place, have been cut off by the teredo in a single year. (Ellis Exhibit No. 3, pp. 33 & 34.) Considering the greater life of the tie, it is difficult to determine whether the cost of this supply, fairly charge- able to any given year's traffic, or any given amount of tonnage, has increased or decreased. LABOR CHARGES. It is claimed that labor is costing the railroads more money, and this is urged as a justification for increases in freight rates. It is true that most railroad employes are receiving more pay per day in recent years than in earlier years. Mr. Wettling produced two tables, attempting to show the increase in the amount of money paid to labor on western railroads. (Wettling Vol. 1, Exhibit 15 and Exhibit 4.) This exhibit shows a very large increase of the amount paid labor in dollars and cents; further it shows a sub- stantial increase in the wage paid per man. Granting that these facts are correctly stated, it now becomes necessary to consider what conclusions can be arrived at from that table. It is impossible to determine from those figures presented by Mr. Wettling whether it is costing more or less per ton hauled a mile, or per dollar earned, in recent years than in former years, for the following reasons : First : No account is taken in the said exhibits for the additional tonnage handled. Second : The labor charges there summarized on those exhibits are not confined to railroad operation, but they include railway construction of betterments and improve- ments. 76 THE EVIDENCE If the carriers should chance to do a larger amount of construction during the latter period than during the former period, the labor charges would consequently amount to a larger sum of money during the latter pe- riod than during the former period, and might make a larger labor cost per dollar earned, or per ton hauled a mile. Such a conclusion, of course, would be fallacious. In- cluding in this labor charge the cost of labor devoted to the construction of betterments and improvements com- pletely invalidates the comparison. That we are correct in the proposition that labor, con- nected with improvements of property, can be charged to operating expenses, we cite the following extracts from the record 1 ' Mr. Thorne : That account in the I. C. C. reports makes no distinction between labor that is used in operating a railroad and labor that might be used in new construction of additions and betterments, does it? 1 ' Mr. Wettling : It does not. ( tr. 784. ) "Mr. Thorne : That comparison is taken from the ordinary forms, of course, of the reports to the Com- mission? "Mr. Wettling: Yes, sir. "Mr. Thorne : There you do not have any division as between the labor that is used for betterments and improvements, or that which is used in ordinary maintenance ? "Mr. Wettling: No, not as to improvements . "Mr. Thorne: You would have to make a separa- tion before you could tell whether the cost per unit of traffic, cost of maintenance per ton mile, has in- creased or decreased, would you not? "Mr. Wettling: Oh, yes, although that might be done in a general way by comparing the additions and betterments activities of one year with another. "Mr. Thorne: Then could you suggest a method THE EVIDENCE 77 that would be fairly reasonable? How would you assume what portion of labor has gone into mainten- ance because of additions and betterments? How would you approximate it ? "Mr. Wettling: I would make a study to find out about what proportion of additions and betterments would be represented by labor costs in some one year and make the proportionate deduction based on such a study as that and assume it held so on the aver- age." (tr. 4113-4114.) Considering the enormous sums in connection with bet- terments and improvements that can be included in such labor charges, as are presented in the compilation of- fered by Mr. Wettling, if a railroad company desires to raise the standard of its track throughout its entire sys- tem, removing old streaks of rust that have been stretched along the ground for a generation, tearing up old rails, putting heavier rails on every foot of track on the entire property, the total cost of picking up the old rails, tear- ing out the spikes, gathering the rails up, disposing of them, distributing the new rails, laying of new rails, to- gether with all frogs, switches, ties, plates, protecting traffic in the meantime while this reconstruction is in progress, putting in cement bridges in place of wooden bridges, expensive tunnels, lining tunnels with concrete, putting in heavier expensive trestles, overhead crossings, etc., also a large part of the labor charges run- ning into millions, would be charged to operating ex- penses, and made a part of the figures Mr. Wettling pre- sents. Wettling Vol. 1, Exhibit 15, shows the increase in labor, number of days worked, amount of compensation and rate per day, also a comparison of subsequent years with 1900. The first two items have no significance as they take no account of the very large increase in mileage and of traffic handled. The comparison, therefore, must be of the increase in the average rate per day and that should 78 THE EVIDENCE then be compared to the traffic handled or the dollars earned. Chambers Vol. 2, Exhibit 4, page 5, shows that the in- crease in labor for maintenance of way and structures per man per day on the Chicago, Rock Island & Pacific Railway was 5.52%, when comparing period 1905 to 1907 inclusive, and 4.24% when comparing period 1904 to 1907 inclusive, with period 1908 to 1914 inclusive. The reason for going back to 1904 only, as explained in his testimony, was on account of the very large increase in mileage taken in by this road in 1904. This comparison of labor in maintenance of way and structures was not made for any other road, for the rea- son that the only other road of which an analysis was made, was the Chicago & North Western, and the labor factor did not enter into the compilation made. Chambers Vol. 2, Exhibit 4, page 1, shows that the in- crease in labor for maintenance of equipment per man per day on the Chicago & North Western was 5.88%, when comparing the period 1901 to 1907 inclusive, with the period 1908 to 1914 inclusive. The same exhibit, page 3, shows the increase per man per day on the Chicago, Rock Island & Pacific Railway was 14.85%, comparing the period 1901 to 1907 inclusive, with the period 1908 to 1914 inclusive. The increase on the Chicago, Rock Island & Pacific Railway was considerably higher than on the Chicago & North Western, although the average wages per day in the period 1908 to 1914 inclusive, was less, be- ing $2.32 per day on the Chicago, Rock Island & Pacific as against $2.34 on the Chicago & North Western, but the average rate per day in the first period was much lower on the Chicago, Rock Island & Pacific than the Chicago & North Western, making the increase larger. The increase in machinist labor was greater than the other labor for maintenance of equipment, which might THE EVIDENCE 79 make the amount chargeable to repairs of locomotives slightly more and repairs of freight and passenger cars less. Machinist labor being only about 10% of the labor for maintenance of equipment and the repairs of locomo- tives being almost exactly the same as repairs of passen- ger and freight train cars, the use of the average per day would not materially affect the total of maintenance of equipment. While the average wages per day for maintenance have slightly increased the second period over the first, in order to determine whether labor is costing more or less, consideration must be given to the results obtained from a day's labor, and the cost of labor out of a dollar earned. This is readily determinable as far as "Transportation Expenses" are concerned, but it is impossible to obtain for maintenance until adjustment is made for additions and betterments charged to operating expenses and for raising the standard of the property. Mr. Wettling claimed labor had increased more in transportation than any other department; that may be true per man, but when you come to apply it to the traffic handled you find labor costs have declined. COST OF LABOR. "Mr. Thome: Have you filed any statement showing the cost of labor per ton mile? ' ' Mr. Felton : Labor in connection with transpor- tation would show decreases, because of the increased train loading, sir. ' ' TRAIN LOADING. "Mr. Thorne: About how much has your train loading, the number of ton miles, increased since 1910? "Mr. Felton : In 1910 our average tons of revenue freight per train mile were 302; in 1914, 474.75. (tr. 207.) 80 THE EVIDENCE RETURN ON NEW CAPITAL. The carriers have occasionally argued that they were unable to earn an adequate return upon new capital, and consequently this makes their securities unattractive to the investor. In order to test the validity of this proposition, we have compiled the following table: THE EVIDENCE 81 h 9 H CQ - > Z — H eJ H K o a g a < E o c ■ o h • ON»eNi'^<(MiHe7seoo> WOSllNIOtOHOmOOLOOOO w^^t-ec^eja«D«©e»ar'*t-r to oo w" h m » (» o >3 e» h" o co oiojiioHooNoor-HMOitn (e*HHHOOl»»'*MH 3 », -4-> 09 a 1 o M o n 03 • H P GQ 4-> «•<-> 0> C « « O l-> m« » * C-u I* Ooo « fci 3 ^i«H(DtO<<'^'t- (OOlOOOt-NOMiat-OSMlO (O ^N * O fl W M^OO^O^t^t^N HHaOOMt>(OlOC4COHMCO tH r-l 9 P Oh O °> 3 « H Hi ♦J a ■ o h ■ Oh t-T-iccooo d » in u) 1a ■*' c-i m o ■* ■* cc •*' II gs H GQ •4-» 3 ®£ (- ft CO O O D H «g^U5Ht"WOO*^NOOM M05io»w«tei^e)>t^^t^eo o ^ n «equ9eqrH «eoeNTcooo«o'iHooeNrrH" VNooe»oc CJi Oi OS 03 O C7> OS C7> C7> 0> »Hi-ti-tT-tT-tT-tTHrHTHiHTMrHTH eoeoeococoeoeoeocoeocoeoeo iHiHtHT-trHiHrHTH»HrHrHi-ti-t Qfe CTi 0t CJ> Oi OS OS OS OS OS OS OS OS CQ 4 r d r <* rig d •: ..a Oca °3gq 0^ £ S a W o 4 9 S i .. o a o .=5 *-> ai (- 5 en en CD hi C ftO a o _- U 1 82 THE EVIDENCE This table shows how much the Northwestern group of railroads had increased their property in 1913 over each one of the preceding years in the table. It also shows how much they had increased their net operating income, with the resulting percentage. In the same way the table shows the increase in net corporate income in 1913 over each one of the preced- ing years, and the increase in capital stock in 1913 over each of the preceding years, with its corresponding rate of return. REDUCTIONS AND ADVANCES. It was sought by the carriers to give the impression that many reductions have been effected by state commissions on Western railroads. This was undertaken by numerous sweeping generalizations made on the stand, typical of what has been constantly stated and reiterated in the public press for a number of years. Upon the other hand, rarely does any person see anything about the advances that have been permitted in this same territory. Mr. Felton overstrained this point when he stated on the stand that only seven advances were put into effect in this territory last year. His exact language was as follows : "Mr. Felton: Mr. Thorne, let me answer you a little further, because I think I can make this clear to you. There are seven advances in our territory in the last year on seven articles and there are nine re- ductions. "Mr. Thorne: Do you seriously maintain that there have only been seven advances in the past year in your territory? "Mr. Felton: That is in our territory, yes, sir. That statement I had prepared yesterday and it shows nine reductions on certain commodities. The traffic officials will bring all that out." (tr. 271-272.) To test the accuracy of Mr. Felton 's statement, a com- petent rate man was asked to make a check of the ad- THE EVIDENCE 83 vances that have been permitted by the Commission to become effective during the last year, that were proposed by the railroads respondent in this case. Mr. Kirkland was employed for this task. He was formerly in the General Freight Department of the Illinois Central Rail- road, and has had 25 years of experience in this kind of work. Mr. Kirkland found advances had been made since January 1, 1914, on 147 articles; that these advances ag- gregated in number 6,735, instead of 7, as Mr. Felton stated. These six thousand advances are in addition to large and substantial changes in classification, advances ranging from 10 to 100% in amount, on over 200 different articles. In making the foregoing computation Mr. Kirkland would find advances to Chicago and points taking Chi- cago rates. The Western Trunk Line tariffs show 1,636 points taking the Chicago rates on shipments to St. Paul and Minneapolis. He did not multiply the number of ad- vances to St. Paul by 1,636. Had he done so, instead of being six or seven thousand advances, there would be several million advances. In the same way, there are over 1,700 stations taking Kansas City rates; all of which are affected by advances to and from Kansas City. There are likewise a large number of stations taking the same rate as St. Louis, Chillicothe, Omaha, Peoria, Galveston, Houston, Winona, Duluth, etc. In the same way he only counted these advances once. The details from which these deductions have been made were all compiled in an exhibit showing the articles advanced, the amount, the rate, the tariff, etc. Some, of course, are of insignificant character. Others are exceedingly important. The gist of this evidence is simply to show that there have been large numbers of advances already permitted in Western Trunk Line, Trans-Missouri, and Southwestern Terri- tories during the past year. You have already 84 THE EVIDENCE made this Western Territory share a large burden of the increased tax forced upon it by the carriers. In addition to this, you have made these Western states bear a large portion of the advances granted to eastern railroads, since the bulk of our class traffic goes to and from eastern points, and is affected by the advances that have already been granted. In the Eastern Advance Eate Case, Mr. Morris offered in evidence an elaborate compilation of concrete rates, attempting to prove that the general level of freight rates in Central Freight Association Territory was lower than in other portions of the country. The exhibit had the de- sired effect upon the minds of the Commission. The ex- hibit which he offered was simply a comparison of tariff rates without any handling of tonnage affected, and with- out any attempt to be exhaustive, or to summarize the situation as a whole ; simply a series of rate comparisons, chiefly class rates, which are said to move less than 10% of the freight. We have pursued the same policy as Mr. Morris, with the exception that our analysis is far more extensive and exhaustive in character. We have, in the Western case, selected 15 commodities on each of which there is ordi- narily a large tonnage; also, on less than carload rates, we have selected a few representative articles. A com- parison of class rates east and west would be meaning- less because the articles are classified differently in the different classifications, and because there is a larger number of classes in the west than in the east. Mr. Kirkland stated that while on many of the issues there are more points shown in the west than in the east; yet it should be noted that in all parts of the east, or in what is known as Central Freight Association Trunk Line, and New England Territories, the scale is very much the same. In the west it is very different, and an effort has here been made to show the rates in the various THE EVIDENCE 85 sections of the west, or those portions of the west, known as Western Trunk Line, Trans-Missouri and Southwest- ern Territories. This exhibit shows in a remarkable manner how greatly the western rates already exceed the rates in effect in the Eastern Territory after the advances* which you have permitted in that section, had gone into effect. ANALYSIS OF REPRESENTATIVE RAILROADS INCLUDED IN WETTLING'S LIST AFTER PLACING PERIODS ON SUBSTAN- TIALLY SAME BASIS. Mr. U. G. Powell, chief statistician to the Nebraska State Railway Commission, made an exhaustive analy- sis of representative railroads included in Mr. Wettling 's list of forty-one companies. The details of the work are set out in the exhibit and in the record. Mr. Powell ascertained from Mr. Wettling, as soon as he could, the railroads that Wettling was going to cover in his exhibits. From this, Mr. Powell made a selection of six that he thought were representative of Mr. Wet- tling's list. He early reached the conclusion that it would be impossible to cover all the railroads in the territory, and he desired to make a test of the conclusions arrived at by Mr. Wettling. In the case of the Santa Fe he deducted an excess book value of $102,000,000, as described by him on the stand. This was added to the property account without anything whatever being added to the property. This statement was unchallenged by parties to the case, and is presump- tively correct. It was also testified to by Mr. Lauck. Mr. Powell made one other change in the property ac- counts of the carriers that is of substantial importance. He found the Missouri, Kansas & Texas property account excessive, and placed it on substantially the average 86 THE EVIDENCE value per mile of the Chicago, Burlington & Quincy, the Chicago, Milwaukee & St. Paul, the Chicago & North Western and the Rock Island railroads, at the beginning of the period, adding betterments and improvements which have been acquired by the company since that date. He arrived at a value of $35,000 per mile, which corre- sponds quite closely to the figure arrived at by Mr. Com- missioner Harlan in Texas R. R. Co. v. A., T. & S. F., reported in 20 I. C. C. at page 463. By placing the depreciation accounts upon the same basis before, and after, the change of rules which oc- curred June 30, 1907, and by deducting from property such additions and betterments as have been built out of surplus, Mr. Powell arrives at the following average rate of return upon property investment of his six roads, from the year 1899 to 1914 inclusive : Excluding additions and betterments Including additions and betterments 1899 6.31 6.91 7.20 7.93 8.13 7.45 7.42 8.50 7.51 8.88 7.79 8.91 8.27 8.35 7.41 7.93 7.02 8.02 7.79 5.37 1900 6.03 1901 5.98 1902 6.53 1903 6.68 1904 5.98 1905 5.90 1906 6.73 Avg. 8 years 6.13 1907 .. 6.84 1908 5.97 1909 6.67 1910 6.21 1911 6.34 1912 5.54 1913 6.06 1914 5.38 Avg. 8 years 6.06 Avg. 16 years 6.11 It will be noted that Mr. Wettling 's division of the pe- riods serve several purposes. In the first place, it threw THE EVIDENCE 87 the panic year, 1908, into the latter period, and the ex- tremely prosperous year,* 1907, into the average of the first period. This division also threw the burden of the change of accounts, which added depreciation accounts to expenses into the second period, and also the additions and betterments out of surplus to property, into the second period. Mr. Powell has carried the division back one year, making the groups cover 1899 to 1906 inclusive, and 1907 to 1914 inclusive. This shows, on the basis we have described, that the average rate of return on property during the second period is greater than during the first period. The foregoing table covers the following railroads ; ROADS A., T. & S. F. Ry. Co 11,304.21 miles owned 1914 C, B. & Q. R. R. Co 8,942.46 C, M. & St. P. Ry. Co 9,578.48 C. & N. W. Ry. Co 7,945.50 C, R. I. & P. Ry. Co 7,631.87 M., K. & T. Ry. Co 3,604.47 Total 49,006.99 While the railroads selected by Mr. Powell are not representative of the Northwestern group, they do repre- sent the list of railroads Mr. Wettling selected. The substance of this presentation is to the effect that the exhibits introduced by the carriers' experts do not correctly show the true comparisons between the period since 1907 when the present accounting rule of the Inter- state Commerce Commission became effective, and the eight-year period prior thereto; because in the prior period a very large amount of additions and betterments were paid out of surplus and charged to profit and loss, and in the latter period were charged to property invest- ment. The methods used by the carriers in the prior period had the effect of holding down or shrinking the property 88 THE EVIDENCE investment account and consequently showing a greater net operating income in terms of percentage. Under the Interstate Commerce Commission's accounting system obtaining in the latter period, this situation or method is completely reversed. The railroad experts made no attempt to harmonize or recast their figures as between the two periods set up by them in their exhibits, and as a consequence, or result of the different accounting methods used in the two pe- riods (4835), the figures and exhibits so presented by them failed to disclose accurately and correctly the true condition as between the said periods. The special study made of six roads, to-wit: Santa Fe, Burlington, Milwaukee, North Western, Rock Island, and the Katy, which own 49,006 miles of road, or over 50 per cent of the mileage of the roads involved in this controversy, shows, that, in the period 1898 to 1906, $86,220,421.82 was the combined surplus earnings of said roads used in additions and betterments not shown in the property investment account; and that, in the period 1907 to 1914, not only was surplus so applied, charged to property investment account, but that the carriers in addition charged off as a part of operating expense an arbitrary depreciation charge of $67,098,737.00. While this amount is deducted arbitrarily by the car- riers from their income it is not carried on their books as an actual liability against the assets of the companies. This is speaking as to these six railroads. In substance the study shows that the six roads in question had a net income over and above all expenses sufficient to pay an average return of 7.51 per cent in the first eight-year period, and 8.02 per cent in the last eight- year period on all property investment excluding so much thereof as was paid for out of surplus earnings ; and an average return of 6.13 per cent for the first eight-year THE EVIDENCE 89 period and 6.06 per cent for the last eight-year period shown by the carriers ' own balance sheet. The net surplus of the six roads in question after pay- ing all operating expenses, taxes, interest and dividends, in the first eight-year period was $190,681,161.60, and in the second period $228,412,885.69, or a total for the en- tire period of $419,094,047.29. (tr. 4837.) 1914, A YEAR OF DEPRESSION. The world-wide financial stringency in 1913, which was followed by a general depression in business throughout the United States in the fiscal year 1914, is common knowl- edge. This was specifically referred to by the Commission in its decision in the Five Per Cent Case, 31 1. C. C, 419 ; also on page 424 in the same decision. The carriers frank- ly conceded the same situation in their testimony in this proceeding. The year 1912 was a year of expansion in general business, upon a pronounced scale along many lines. The year 1913 was a striking contrast with 1912. The situation was acute in Europe. Large industrials, like the General Electric, were obliged to pay exceedingly high rates — as much as 614% for $8,000,000 upon a nine months' maturity. By April 29th the municipal bond market gave evidence of rapidly increasing stringency. New York City was obliged to pay 4y 2 % for $45,000,000 long term bonds, against previous issues of 4% and 4*4% in preceding years. Over fifteen and one-half million of municipal bond offerings proved unsuccessful in April, nineteen millions in May, twenty-five and one-half mil- lions in June, and fifteen millions in July. In June Ten- nessee failed to place 4% forty year refunding bonds ; and in order to provide for maturing 3's, was obliged to is- sue $9,401,000 5% notes, which were sold on a 7% basis. Internationally, disturbances commenced to assume serious proportions. The Mexican situation became cha- otic with the overthrow of the Madero government. In 90 THE EVIDENCE Europe, the Balkan disturbances commenced, and the period of conflict occupied the first nine months of the year, upsetting the international money markets. The enormous increase in the armaments of France and Ger- many produced distrust which was disconcerting, and which helped to produce a world period of depression and crisis. The heavy governmental borrowings forced such a stringency in loanable funds that London bankers agreed to hold up all corporate financing. The market prices of Mexican investments suffered severe losses. The crops of a few staples during the summer of 1913 suffered severely by widespread drought. The situation is briefly summarized in the following table : Shortage compared with 1912 Corn 677,758,000 bushels Oats 296,569,000 bushels Potatoes 89,122,000 bushels A general liquidation in the stock markets continued pretty much throughout the year. Industrial stocks and railway stocks were both similarly affected. The first half of 1914 was a dismal year for general business. War in Eastern Europe did not break out until August; but, preceding this cataclysm, the indus- trial situation kept continually growing worse. The Mexican situation, upon several occasions, threatened complications of a most disastrous nature. From the high points in 1912, up to the closing of the New York Stock Exchange, the two averages of railway and industrial stocks, kept daily by the Wall Street Jour- nal, registered a decline of nearly thirty per cent each, conclusively proving that all business has been going through one of those depressions which have occurred, at THE EVIDENCE 91 intervals of ten or twenty years, during the past one hundred years. These facts which we have recited, are not related, with particular materiality, to the present case, except as they are matters of common knowledge, with which all are generally acquainted. In our discussion of the issues in this case, the fact that the year 1914 was a year of general depression throughout the world must be kept in mind. It was testified to by Mr. Norton, who detailed the financial stringency. Mr. Chambers mentioned it (tr. 13662) ; also Mr. Wallace (tr. 4368). During the cross-examination of Mr. Wade, he said: 1 ' If you take the year 1914, you are not fair in mak- ing the comparison, because in the first place, four months of that year you were in the midst of a panic and the other eight you were in a depression" (tr. 399). Mr. Bush, president of the Missouri Pacific, referred to the same fact: 1 ■ Mr. Barrow : To what condition do you attribute the falling off in your revenues, Mr. Bush, freight rates or depression? 1 * Mr. Bush : I attribute the falling off in our gross revenue, of course, to the general depression which has prevailed throughout that section, which has affected not only our road, but all of those roads" (tr. 524). It was so stated by the Commission, in its decision, as referred to above. It was also admitted by carriers in this proceeding. The general depression in all industry was evidenced by witnesses engaged in all lines of busi- ness, who offered evidence in the case. It is unfair to accept that year as representative. For these reasons, we will have occasion to refer more fre- quently to the year 1913. 92 THE EVIDENCE « m gp £P M od oa «M oo MM oo 03 C»S M fcPg O HH — — O p W P H &2 HO M M^ 03 P Oh EhK ^ob oo oo t^ ws ^^»o *© to »© to OL1CDMO CO CC 00 "«* «*< 2§§§g ?SKS§ .^"C^OM NNOOS COU510 0N oioqoqr-;^ M^fflOCO f IONNHO rH^HO^Ht^ I OSMacO-^CO id io 10 "O ■* ; i- ■* ■* ■* ■» _OCOlOrtlO ■*^«5 iou3ioid t^ONCOO scor-co ««»( oc»cooo i nOMWH , > lO Ift OS )oo osos ■^"oooo •»)< o» N eo ■"!< ■*""»• t— *f< co n^CO CO CO CO CO ^oiflwiooi 02i--m»< o en cm onomio Oit>-OCO»C 00-c ■** co —< e» e» oot»eo.-iN CO ■"*"*< 00 00 (OiOH^OO COCOCOIM-H HO««0 ©rtOICO** WOM10O ooocooooco 00Q0OO0O0O O — I— I H < H 3 b O H H i— i O g i O ^ t» T-l t~- kO T-J 00 00 1" CO «* US -W" CO 00 00 r- CO 8 r-1 oo © © oo © to 0k r-l co <* us -*' co ai oo t- « © r-l Irt CO t> US US 00 tH CO 'T "* "* CO © oo t- tH IA r-1 ■ n © -*< US r- co «* ^" ■♦ ** © oo oo © ■* r-l Ifi N « ■* CO US © T-l CO •<»" **• •*" ^« © oo oo © r-l o •* r-J ^r N N C4 © T-l CO ■*« «* "* CO rH oo oo oo t- o « N b US t> tH © tH co -«<|j ; W •«" © t-i 00 t- t- CM o ^ <6 t- us t- © © 1-t CO -»< " 39 r-l CO -*r •*■' "* © © oo t- US rH o tH © CO tH C-; © © r-l CO CO ^* ^ © us t- t- •* t- O r-J r-J US CO CO t-; © r-l CO ^i ** "# t> CO t- t- CO 00 o © iH © CO t-J © tH c: -—' ~r "*J US r* t- C- W us © © © "* t-J «NJ ■*< © T-l CO CO ^ •<* 00 •*« t- t- iH r-l © © © TjJ r-J « <# © r-l CO CO ^ •*« t-^ CO t- t- © CM © © © oo co -<*• csj © r-l co co ^ ■*> t> © r> t- Average Actual Municipals and s — Western Rail- 1 a u © GO © •s -u o m u oo a ^ © si ©o f. 03 cs N 2 2 e Credit (Ratio of our Governments era Railroads) . . . e Credit (Ratio of our Governments 3tern and South- »rt T5 TJ © a Rate- sin of nments al Yieli Bonds) al Yiel 41 Bon ual Yi rn Rai Relativ and F o West Relativ and F to Wei ilroads ure Money Yields— Mei Four Gover verage Actu roads — (45 verage Actu Railroads ( verage Act Southweste (86 Bonds) oefficient of Municipals Combined t oefficient of Municipals Combined western Ra Ph < < < U O CREDIT In the foregoing table the Northwestern group of rail- roads (corresponding to what Mr. Norton called the West- ern group) includes all of the bonds of all the railroads in the Northwestern group, which were quoted substan- tially continuously from 1900 to 1914 in the New York Commercial and Financial Chronicle, and embraces the following railroads: Chicago, Burlington & Quincy; Chi- cago, Milwaukee & St. Paul; Chicago & North Western; Chicago, St. Paul, Minneapolis & Omaha; Great Northern; Minneapolis & St. Louis; Northern Pacific and Union Pacific. The Southwestern group includes the following: Atchison, Topeka & Santa Fe; Chicago, Rock Island & Pacific; Colorado & Southern; Kansas City & Southern; Missouri, Kansas & Texas; Missouri Pacific; Southern Pacific; St. Louis & San Francisco; St. Louis & South Western. This list includes all of the railroads, any of whose securities were quoted substantially continuously between 1900 and 1914, such railroads being embraced in the Commission's original suspension order in this case, and serving the Southwestern Tariff Committee Terri- tory, excluding only those, two-thirds of whose mileage lies outside of said territory. There is only one exception to this — the Southern Pacific Company was taken in lieu of its subsidiaries. It will be noted that the yield on the Southwestern bonds is considerably higher than on the Northwestern bonds. This is graphically shown in the accompanying chart "Z." The chart represents the relative plane of credit, the pure money rate being the best. Next comes the Northwestern group of railroads, and next the Southwest- ern group of railroads. The increase in the yield on the Southwestern group of railroads has been less than that on the Northwestern group, and less than the pure money rate. Again we state that this does not indicate that the Southwestern railroads have as good credit as the other two ; in fact, the reverse is true, as everybody knows, and as the chart proves. It does mean, however, that the 160 CREDIT Southwestern group of railroads have been getting onto a better plane during recent years. They have become \ / 1 \ \ i \ 5 5 \ \ \ \ \ \ 1 \ 1 \ 1 i i \ 1 x i \ \ \ > \ 1 I • * > 1 <2 | if 41 S ^j O w^S >< oif* / i l i » | 1 / i / \ \ • \ \ \ \ \ \ \ \ | — r~ \ \ \ \ J \ i S / t / I « i ! i \ i | \ \ \ \ | 1 1 ! ) • • / -*- i ' ! • \ > V i "> c J CHART Z. CREDIT 161 more established. They have made more progress than the Northwestern group ; they had more room for progress as the chart itself indicates. ARE THE SECURITIES OF WESTERN RAILROADS ATTRACTIVE TO INVESTORS? Are railroad securities unattractive investments 1 Who is the best judge whether railroad securities are attractive or not ? Unquestionably that man is the investor himself. There are a few facts about this subject of credit which can be conclusively established by the records of the mar- ket places of the country for such securities. Credit is determined by the rate at which any person is able to borrow money. If a person can borrow a given amount of money at a cheaper rate than another person, his credit is better than that of the other party. That rate at which one can borrow money is the crystallization of all the multitude of factors that go into the determina- tion of a man's credit. Mr. Wade testified: 1 ' Mr. Wright : What I am interested, Mr. Wade, in drawing out here, is the general credit of these roads in the West, and how it compares with other credit or credits of other institutions, and whether there is a difference in the situation of their credit which has been increased in the last few years. "Mr. Wade: There is distinct, emphatic and un- equivocal extra charge put upon the railroad of 50 to 75% for the use of its money, as against the manufac- turing and mercantile and other commercial parts of the country for the same general kind of credit." (tr. 313-314.) That statement is not correct. Mr. Norton reports he finds the opposite to be true amongst the banking houses of New York City. (tr. 14299-14300.) Mr. Norton's ex- perience with these matters may be summarized as follows : 162 CREDIT Report-writer for a banking house and in charge of actuarial computations on government bonds ; also in the general bond markets. Was with Fiske & Robinson, and Eugene Meyers, Jr. & Co. With the latter firm he was a general report writer, for several years, (tr. 4409.) In the abstract of the record we reproduce a copy of correspondence with Mr. Felix Warburg, of Kuhn, Loeb & Co., New York City, which is self-explanatory. This was not permitted to become a technical part of the record, but is filed with the Commission as a part of the correspondence in connection with the case. Mr. Norton supplemented this investigation by an ex- haustive analysis of the market prices of the securities of railway and other companies, generally, in the United States, to test the accuracy of Mr. Wade's claim, stated above. As his authority for market prices on securities, Mr. Norton used the New York Commercial and Financial Chronicle. Concerning the reliability of this publication Mr. Wade testified : 1 ' Mr. Thorne : Mr. Wade, is there any public record of sales of securities listed on the New York stock exchange ? That is, a record that is published by per- sons of such a character that it commands the con- fidence of the bond houses and people in the banking business? "Mr. Wade: Yes, sir. "Mr. Thorne: What would you suggest, — the Fi- nancial Chronicle, is that reliable? 1 ' Mr. Wade : Quite so. 1 * Mr. Thorne : Substantially so ? 1 ' Mr. Wade : Very much so. 1 ' Mr. Thorne : Is there any better in the country ? ' ' Mr. Wade; No, I think it is about as good as any in the country. The Analyst of the Times, perhaps, is one also." (tr. 335.) Norton Exhibit 4 contains a list of the best class of in- CREDIT 163 dustrial and public utility securities, that are quoted at the leading market on this continent. In this list Mr. Norton gathered together all of the bond issues of all the industrials that are quoted substantially continuously, from 1900 to 1914, in the New York Commercial and Fi- nancial Chronicle. In this table we have the securities of 36 representative industrial companies of all classes including manufactur- ing and industrial, coal and iron, telephone and telegraph, electric light and power, and miscellaneous bonds. The average yield on these bonds in 1914 was 5.9% ; in 1913 it was 5.7% ; in 1910 it was 5.4%. In other words, last year these industrials as a whole had to pay almost 6% for their money. In Norton Exhibit 3 we have gathered together all of the bonds of all the railroads involved in this case, that are quoted substantially continuously between the same years, 1900 to 1914. In the Northwestern group of rail- roads there were 45 such bonds, the summary of which is shown on page 14 of said exhibit. The average yield on these 45 bonds was 4.5%. In other words the industrials as a whole, had to pay 31% more for their money than did these Northwestern railroads, in spite of the amazing declaration by Mr. Wade that the railroads had to pay from 50% to 75% more than the manufacturing and in- dustrials. When Mr. Wade was asked to give the facts upon which he based such a startling conclusion he couldn't give any facts. He could not name the rate at which any of these railroads, with only two exceptions, were able to borrow money, and those two exceptions were the Missouri, Kansas & Texas and the Missouri Pacific, two of the weakest properties in the territory. He was asked several times to state the rate at which other railroad companies in this territory could borrow money. Every time he admitted he could not state, and finally admitted he was not acquainted with it because 164 CREDIT those companies did not borrow their money in the West, that the bankers in the West were too small, and that they went East for their money, (tr. 352.) Is our list of Northwestern railroads representative? Let us see. We have used 6 bonds of the Chicago, Bur- lington & Quincy; 6 of the Milwaukee; 10 of the Chicago & North Western; 3 of the Chicago, St. Paul, Minneapolis & Omaha; 6 of the Great Northern; 3 of the Minneapolis & St. Louis ; 7 of the Northern Pacific, and 4 of the Union Pacific, having excluded those railroads having over one- half or two-thirds of their mileage outside of the territory. We have included in this list the securities of every inter- state railroad serving this territory with only one excep- tion, the Soo Line — Minneapolis, St. Paul & Sault Ste. Marie, a company having splendid credit, as evidenced by the fact that they were able to borrow $1,800,000 in round numbers, in 1914, a period of high yields, at a rate of 4.5%, this figure including all commissions, expenses and dis- counts. (Norton Exhibit 5, page 22.) The reason this com- pany was not included in the previous table, referred to as Norton Exhibit 3, page 14, is because none of their securities run through the period 1900 to 1914 inclusive. Keeping in mind the average on the industrials of 5.9%, let us consider these individual companies. The average on the Burlington bonds 4.3% Milwaukee 4.4% Chicago & North Western 4.5% Chicago, St. Paul, Minneapolis & Omaha. .3.5% Great Northern 4.4% Minneapolis & St. Louis 5.7% Northern Pacific 4.7% Union Pacific 4.5% In every instance the yield was 25% less than that on the industrials with only one exception, and that was the Minneapolis and St. Louis, and even this one was less than the average on the industrials. The Minneapolis & St. CREDIT 165 Louis is not a representative railroad in any sense of the word and cannot be accepted as a standard. This the Commission itself held in its decision in the Western Ad- vance Rate Case of 1910. No carriers in this case made a claim that that company was representative. Not a witness, who was asked to state the representative typical lines in this territory, made any mention of the Minneapolis & St. Louis. Further, we find that these railroads had a better credit last year — notwithstanding their repeated cries of wolf, claims of panic, and crises — they had a better credit and were able to borrow their money cheaper than any class of industrials. First: If you will refer to Norton Exhibit 4, page 3 (Volume I, sheet No. 72-c), you will notice that five representative manufacturing and industrial securities of the highest type, including the American Cotton Oil, American Spirits, American Thread, American Writing Paper and International Paper, had an average yield on their bonds of 7.3%, and excluding the American Writing Paper which is abnormally high, the average is 5.7%, which is practically one-fourth greater than that of the Northwestern group. Second: On the same page is shown the yields on coal and iron bonds. With only one exception, that of the Lehigh Coal & Navigation Co., the yield on the bonds in that series is greater than the average on the Northwest- ern railroads. The average yield on the coal and iron bonds is 5.5%, which is approximately one-fourth higher than that on the Northwestern railroads. This is exclusive of the Wilkesbarre security which if included, would make the average still greater on the industrials. Third : In the Telephone and Telegraph bonds we have the highest class of securities represented, including the 166 CREDIT Western Union, the Chesapeake & Potomac, the Cumber- land, and New York & New Jersey. In every instance the yield on these securities is greater than the average on the Northwestern railroads. The average on the Tele- phone and Telegraph bonds is 4.9%. Fourth : Under Miscellaneous bonds, we have a dozen high-class securities represented. The reason we say they are high-class is the proposition Mr. Wright himself ad- vanced that the older, better-established companies are the ones whose securities run back to 1900. We find here in every instance the yield on the industrial higher than the average on the railroads. The average of these twelve industrial securities amounts to 6.3%, which proves again that the railroads get their money cheaper than the in- dustrials. Fifth: The only electric light and power bond running through the period is the Niagara Falls Power 5 's giving a yield of 4.9%. This of course is a high-grade security and well seasoned, and commands the confidence of the public. We find the average of the industrials is over 20% higher than the yield on this security. It is there- fore a much higher grade security than the average in- dustrial bond, and yet we find the Northwestern railroads are paying less for their money than does the Niagara Falls Power Co. Turning to the public utilities we find 38 bonds whose securities run through the period from 1900 to 1914. Thirty-three of these 38 bonds of public utilities are pay- ing more for their money than the Northwestern rail- roads. The average yield on the 38 public utility bonds is 5.1%, which is higher than the average on the North- western railroads. This is exclusive of the 10-23rd St. Ferry Co. security, on which the yield was so high that if included the aver- age would be less representative. CREDIT 167 Because of the foregoing facts so far as the Northwest- ern group of railroads is concerned, we must conclude that their credit is superior to that of any class of industrial or public utility bonds that are quoted on the market. We have certainly selected a high-grade, typical, representa- tive class of industrial and public utility securities for the purpose of comparison. In the list of railroads, we have used every interstate railroad serving the territory, pro- viding it has at least one-third of its mileage in that territory. Are the figures we have given above as to the market prices of the securities of these companies, a sufficiently accurate gauge of the rate at which these people can se- cure money; or should we investigate the yield on new issues of securities ? This was the point urged by the Eastern railroads which we did not attempt to meet. We did not at that time have data showing the yields on new issues. The same objection was made in 1910, and again we did not have the data to meet the issue. However, we are for- tunate at this time in being able to present to the Com- mission the most comprehensive analysis of yields on new issues that has ever been made by any person, so far as we have been able to ascertain. The railroads secured at our request, data concerning new issues of their securities from 1901 to 1914 inclusive. They divided this into two groups: the period from 1901 to 1907 inclusive and 1908 to 1914 inclusive. We have only attempted an anal- ysis of the latter period; because of the work involved, and the importance in this particular case, we have con- fined our investigation to those years. In Norton Exhibit 5 we have gathered together the par value, and net proceeds, above all commissions, discounts and other expenses, of all the new issues on the Western and Southwestern railroads between the years 1908 and 1914 inclusive. Also, we have similar data on all of the 168 CREDIT industrials and public utilities for which we could secure such information. This includes all of the industrials and public utilities in the City of New York, and the state of New York, and the state of Massachusetts that had to secure the consent of the Commissions in that city and those states, before the issues could be made. Also, we have included the yields on a number of industrials, in- cluding the United States Steel Corporation, and all of its subsidiaries. This list of industrials and public util- ities is not in any sense of the word whatever, a selected list; it simply includes all of those we have described in the states of New York and Massachusetts, and all of the industrials we were able to obtain, comprising a very rep- resentative class of high grade securities. Concerning the use of this exhibit, there are a few per- tinent comments that should be made. In the first place, the yields on new issues of such representative railroads as the Chicago, Burlington & Quincy, Chicago & North Western, Minneapolis, St. Paul and Sault Ste Marie, Chi- cago, St. Paul, Minneapolis & Omaha, Southern Pacific and Santa Fe, will be found very close to the yields ar- rived at by the use of current quotations on outstanding bonds. In other words, the exhibit on new issues is a com- plete confirmation of the reliability of the current market quotation on outstanding securities as an index of rail- way credit for representative railroads. A few examples will be given. Take the year 1914; the yield on the new issues of the Chicago & North Western is 4.4%. This figure is arrived at after making due allowance for all commissions, dis- counts and expenses connected with the issue. The yield on the outstanding securities of the same company ar- rived at by means of current quotations on the market is 4.5%, a variation of 1-10 of 1%. The small yield on one of these railroad bonds was due to the fact that the own- ership of this bond carried with it the right to exchange CREDIT 169 for another bond at a higher yield, covering a longer period of years, partaking somewhat of the nature of a right to purchase stock at or below market price. During the same year, 1914, the Burlington paid 4.4% for new money. An average arrived at by the use of cur- rent quotations on the market for outstanding securities is 4.3%, a variation of 1-10 of 1%. The same situation — the reliability of the current quo- tations as an index of credit — is further confirmed by tak- ing the consolidated figures for all of the Northwestern railroads, 1908 to 1914 inclusive. The average yield, using new issues, in 1908 was 4.5%; using current market quo- tations, 4.3%. In 1909 using new issues, 4.1% ; using mar- ket quotations 4.1%. In 1910 using new issues 4.1%; using market quotations 4.2%. In 1911 using new issues 4.5%; using market quotations 4.2%. In 1912 using new issues 4.7% ; using market quotations 4.3%. In 1913 using new issues 4.5%; using market quotations 4.6%. In 1914 using new issues 4.6%; using market quotations 4.5%. Taking any representative railroad the same fact is estab- lished. The North Western has been constantly referred to as a typical railroad in this territory. In 1914 this railroad issued $8,000,000 in gold bonds at a yield of 4.4%. Compare that figure with the following yields arrived at by the use of market quotations, as shown on page 5 of Norton Exhibit 3, 4.4%, 5.2% (sink- ing fund), 4.6%, 4.7%, 4.4%, 3.3% (a security maturing April 1, 1915, and is explained by the witness. Bonds of well established railroad properties as they approach ma- turity, approximate close to the pure money rate) 4.5%, 4.4%, 4.7%, 4.3%. Taking a straight average we find the average of yields to be 4.4% compared with the average on new issues 4.4%. A similar comparison was made relative to the Burling- ton while the witness was on the stand. 170 CREDIT Another very representative railroad in this territory, which is average and typical is the Chicago, Milwaukee & St. Paul. This company refused to give information concerning its new issues of 1914. However, we do have the data concerning its issue of $30,000,000 in 1913, whereon the yield was 4.6%. Compare that yield on new issues with the following yields arrived at by market quotations as shown on page 5, Norton Exhibit 3: 4.3%, 4.3%, 4.6%, 4.5%, 4.6%, 4.5%. On the whole when a large number of securities are under consideration, we find it is safe to conclude that the current market quotations are the most reliable index of credit which we have for representative railroads. This proposition is further evidenced by the fact that the close inside relationship between the large banker and the directorate of a corporation, may make it possible for the banker to secure an exorbitant commission, which would make the resulting yield not typical of the credit of the company. The best evidence of the credit of a company is the demand of the investors on the market place where there is actual competition in the purchase and sale of securities, and not the price in some private back office, where the intercorporate relationship is made to subserve the financial gains of an interested party. It may be claimed that the banker will make more ex- haustive and intelligent analyses of the financial condi- tion of a company, than the common investor on the mar- ket place who is speculating as to futures. That is true temporarily speaking, but there is on the market place not only a reflection of the judgment of one or two intel- ligent men with large resources, but there is a large group of interests constantly in touch with market prices on the securities of our representative railroad companies. The banker getting the inside bottom price will not let loose of his security, for less than its fair value, regard- less of his handsome margin. Then on the market in- CREDIT 171 vestors include large insurance companies of the country, large bankers and trust companies, as well as the man- agement of many large estates, constantly in search of good investments and it is this interplay and constant competition of the great investors of the country, with enormous resources back of them, which dominate the trend in market quotations over a long series of years. Now and then the speculator fails to estimate correctly what the permanent investor is going to do ; but the per- manent investor is the controlling force, and it is his judgment on the market place, that gives us our best in- dex of the true credit of a given company. Our comments above have related to long term secur- ities and those of representative companies. What we have said as to the close relationship between the market prices, and the rate on the yields on new issues, does not apply to weak companies, or to short term obligations. The reasons we have given above for claiming that the market quotations furnish the best test, rather than new issues, as to the credit of a company, apply with double force as to the new issues of weak companies — companies that are not well established — companies who are hard up for money, and that are being milked by a few financial pirates. The Frisco gives an interesting illustration of that fact. In 1914 we find the yield on a new issue of the Frisco to be 13.1%. Market quotations on outstanding issues for the same year (page 21 Norton Exhibit 3) show a yield of 5.2%. Some person secured a handsome margin in this case. On the Southwestern Railroads we find the following: The yield on the new issue of the Denver & Rio Grande was 5%. The yield arrived at by the use of current mar- ket quotations was ascertainable only in part because the market quotations did not run through the period cov- ered by our table. In 1914 the rate on new issues of the 172 CREDIT Kansas City Southern was 5.3%; using the market quo- tations it was 4.8%. We are unable to secure the yield on the market quotations of the Trinity & Brazos Valley because the market did not run through the period cov- ered. The yield on the Illinois Central using market quo- tations, was 4.5%. Using new issues it was 4.5%, 4.7% and 5.1%. On the Chicago & Alton the yield on a general mortgage issue of $3,500,000 was 6.3% while the yield using market quotations was 5.4%, showing a very large variation which will be found to be generally true of the weaker lines financially. The real estate note of the Chicago & Alton for $17,000 was 5.0% which approximates the farm mortgage rate rather than the credit of the company. These are the only railroads other than in the Western and Southwest- ern group covered by both exhibits. It is our conclusion, and we believe the Commission should so find it, that on representative railroads in this territory, the current market quotations of outstanding issues is a fairly accurate index of the credit of a com- pany; that the* yield disclosed by the said market quota- tions very closely approximates the yield on new issues of securities by the same carriers. Further, that the mar- gin between the yields on new issues and that on outstand- ing securities, as evidenced by current quotations, is very much greater on the smaller, weaker classes of railroads than the representative stronger roads, which handle the bulk of the traffic. We have been unable to secure any representative list of new issues of short term obligations for these Western railroads. The table submitted to us by the carriers in which they attempted to give the new issues, fails to show the net proceeds on any short term obligations; that is bonds or notes maturing in ten years or less for any rail- roads in the Northwestern territory in the year 1914, with only three exceptions — Chicago & North Western, CREDIT 173 Minneapolis, St. Paul & Sault Ste. Marie, and Minneap- olis & St. Louis. We have formerly discussed the unrep- resentative character of the Minneapolis & St. Louis. The Equipment Trust series of the North Western show a yield of 5.5%, but on the Soo Railroad this is 5.1%. Pass- ing over to the same class of securities of public utilities and industrials, we were able to secure the net proceeds on four representative companies : Staten Island & Mid- land showing a yield of 6%; Lake Superior Corporation showing a yield of 9%; Pacific Coast Co. 5.5% and U. S. Smelting, Refining & Mining Co. 6.2%. In the year 1913 the only short term obligations for the Northwestern railroads furnished us, were the Chicago & North Western Equipment Trust Obligations, showing a yield of 4.7%; Soo Railroad showing yield of 5%; Minne- apolis & St. Louis showing yield of 6%. In this we do not include convertible bonds for reasons which are certainly familiar to the Commission, they being not representative of the rate at which a company is able to borrow money. Turning to the public utility and industrial companies, we find during the same year, the 8th Ave. Railroad, New York, had to pay 6%; American Bank Note Co. 6%; Gen- eral Electric Co. 6.5%. In the year 1912 in this class of securities the only ex- ample given in the data furnished by the carriers was: Equipment Trust notes of the Minneapolis, St. Paul & Sault Ste Marie showing a yield of 5%. Turning now to the public utilities and industrials we find during the same year the Kings County Electric Light and Power Co., New York, had to pay 6% (but this was a convertible de- benture and therefore we are disregarding the same); General Baking Co. 6.8%; Studebaker Corporation 8%; Utah Co. 6.2%. In 1911 the only short term obligation shown in the data furnished by the railroads, were those of the Iowa Cen- 174 CREDIT tral and Minneapolis & St. Louis which are not represen- tative. In 1910 the only ones shown by the carriers in the Northwestern group are the Minneapolis, St. Paul & Sault Ste. Marie, the yield being 5.1%. The same year the Coney Island & Brooklyn borrowed $500,000 at 6.7%; the Lackawanna Steel borrowed $10,000,000 at 7.15%; Lehigh & Wilkesbarre Coal Co. secured money at 4.20% (this issue was guaranteed by the Central Railroad of New Jersey). In 1909 the only short term obligation shown in the Northwestern group of railroads — Iowa Central and Min- neapolis & St. Louis and Frisco, which as we have fre- quently stated, cannot be accepted as representative. In the list of railroads, other than the Western and Southwestern, we find the Chicago & Alton, St. Louis, Brownsville & Mexican, Wisconsin Central, Chicago, In- diana & Southern, New Orleans, Texas & Mexico. The only railroad in this series that is concerned at all in this case, and that is representative in character, would be the Wisconsin Central, and the yield on its two short term notes was 4% and 4.5%, lower than any class of public utility issued of a similar character. In 1908 there are no short term obligations shown for the Northwestern group of railroads. SOUTHWESTERN RAILROADS. The Southwestern railroads show a higher yield than those of the Northwestern railroads. Using the current market quotations on outstanding issues, we find the average yield on outstanding secur- ities of ten representative Southwestern lines in 1914 to be 5.1%. This list includes the Santa Fe, Rock Island, Colorado Southern, Kansas City & Southern, Missouri, Kansas & Texas, Southern Pacific, Missouri Pacific, CREDIT 175 Frisco, St. Louis Southwestern, and Texas Pacific. Turning to the industrials, whose quotations between the years 1900 and 1914 are included in Norton Exhibit 4, pages 72A, 72B, 72C and 72D, and Exhibit 3, you will find the average yield on the manufacturing industrial bonds to be 5.7% (excluding one abnormal yield of 13.5%), coal and iron bonds 5.5% (this excludes the Wilkesbarre Coal Co.); on telephone and telegraph bonds 4.9%; on Niag- ara Falls Power bond 4.9%, and miscellaneous bonds an average of 6.3%. The average yield on the Southwestern railroads is lower than the yield on 25 out of the 36 industrial bonds. It is also lower than all of the bonds consolidated. The average yield on industrials being 5.9% and on the South- western railroads 5.1%. We find the average yield on the utilities shown on pages 72-A and 72-B of Norton Volume 1 to be exactly the same as the average for the Southwestern railroads. In 1913 the average yield of the Southwestern rail- roads was 5%; on the industrials the same year it was 5.7%. On the public utilities it was 5.1%. In 1912 on the Southwestern railroads the yield was 4.7%; on the industrials 5.3% and utilities 5%. There were a large number of utilities below the Southwestern as well as above. New issues in 1914. The only issues reported to us by the Southwestern lines were those of the Denver & Rio Grande, Kansas City Southern, the Frisco and the Trin- ity & Brazos Valley. We cannot accept the Frisco as representative. The yield on that was 13.1%. Its un- savory financial record is familiar to the Commission. It is common knowledge. The securities of the other three railroads show an average yield of 5.3%. Turning to the public utilities, we find the average on those four Southwestern securities have a better rate 176 CREDIT than the Consolidated Gas. Co. in New York City, Hud- son & Manhattan Railroad Co., Interborough Rapid Tran- sit Co. and New York Railways. The average on public utilities as shown in the exhibit is less than the South- western railroads. Amongst the industrials we find the Illinois Steel Co. had to pay more for its money than the Southwestern railroads, while the Duluth, Missabe & Northern, Indiana Steel and Euclid Equipment Trust bonds commanded a better rate than those of the South- western railroads. In 1913 the average yield for the new issues of the Southwestern railroads was 6.2%, which is the weighted average. This high yield was due principally to the Fris- co. If you exclude the Frisco the arithmetical average of the yields will be 5.4%. This was a better rate than had to be paid by the following public utilities in New York City and Massachusetts: Bronx Gas & Elec. Co., Interborough Rapid Transit Co., Boston-Worcester Street Ry. and Boston & Northern St. Ry. Co. Other utilities were able to borrow their money at a better rate. The industrials which we were able to secure show the following: American Bank Note Co. had to pay 6%, General Elec. Co. had to pay 6y 2 %. In 1912 the South- western railroads paid 5.4% for their new money on an average. At this time they were not embarrassed by the insolvency of the Frisco. "We find the following public utilities had to pay more for their money than the South- western railroads: Brooklyn Borough Gas Co., New York and North Shore Traction Co., New York Rys. Amongst the industrials as having paid more than these Southwestern lines, were the Republic Iron & Steel Co. Other utilities and industrials secured their money at a better rate than the Southwestern lines. These facts would seem to demonstrate, quite conclu- sively, that railway credit is better than that of any class of companies engaged in any other line of industry. CREDIT 177 STOCK PRICES. In this same way we have compiled the stock prices on all industries whose securities were quoted in the same publication — the Financial Chronicle — and published continuously between 1890 to 1914, inclusive. This, of course, includes the strongest and best classes of indus- trials, they being the American Cotton Oil Company, American Sugar Kefining Company, American Telegraph and Cable, Consolidated Gas Company, New York, La Clede Gas of St. Louis, Pacific Mail and Steamship Com- pany and the Western Union Telegraph Company. In addition to these industrials, we have a list of five of the strongest mining companies in the United States : Amer- ican Coal Company, Consolidated Coal Company, Home- stake Mining Company, Ontario Mining Company, and Quick Silver Mining Company. From 1890 to 1899 the average price on the North Western Railroad stocks was less than the price on the industrials, . excluding the mining stocks. Ever since the year 1899, for each year, the railroads averaged more than either of the industrials, excluding mining, or the industrials including the mining stocks. Norton Exhibit 4, page 123. This is graphically shown on the accompanying chart "Y." (tr. 178.) (Mr. Nor- ton's term, "Western railroads," is synonymous to the use of the expression Northwestern Group by witnesses Chambers, Powell and Ellis.) The Bureau of Labor of the Department of Commerce and Labor has computed the relative prices of about two hundred standard commodities at wholesale in the United States during the past twenty years. These are fully de- scribed in the records of the Bureau of Labor. Mr. Nor- ton has compiled a series of index numbers on commod- ity prices adopting a somewhat different method, which 178 CREDIT i 1 j I / 1 i 5 » f / | / \ 1 | y / j 5 £ < v f 1 1 8 °& lii Sit H .iro > \t kjO Q! 5 *\ 1 \ i i i o ^ j 1 i / .( i r ^ / / 3 V s. ( / ■ V \ \ \ t ) ) 1 < r { N e B 'V ■>, i \ \ s 1 01 1 1 ■ \ N \ \\ Is 5 \ \ { i | 5 1 y ) 5. 1 / i V 5 ( ( q \ \ \ « $ \ \ £ % t i i ! ! Q 1 CHART Y. CREDIT 179 is described in the record. There is no substantial dif- ference in the trend of prices in either group. For the purpose of comparing the trend of prices over a period of years, we have used the same method and compiled index numbers for the market prices of the railroad and industrial stocks. The series of index num- bers cover a period from 1890 to 1914 inclusive. The phenomenal increase in market prices of railroad stocks in 1900 is illustrated by this chart which is shown in Nor- ton's Exhibit No. 3, page 123. The use of relative figures serves to exaggerate the situation. It serves the same pur- pose statistically as the microscope does for the botanist. However, it very fairly develops the tendency. Over a long period of time it is very instructive. We find that market prices on commodities have risen from 1890 to 1914, but the market prices of railroad stocks have gone up more than market prices of commodities, or the market prices of industrial stocks. During the period of 1906 and 1907 railroad prosperity was notoriously great ; and yet we see a great decline in the relative prices of railroad stocks during that time. Mr. Norton explained that by citing the large stock allotments made by rail- roads those years. For instance, the Great Northern made an allotment of ore trust certificates amounting to 100%. These rights sold on the market at $78.00 per share. This was equivalent to a stock dividend. In 1906 and 1907 the Chicago North Western made a stock allot- ment of 45%. These rights sold on the market at $35 per share. The Chicago, Milwaukee & St. Paul in 1906, made a stock allotment at par, when their stocks were selling at $1.76. These rights sold on the market at $33.50 and $55,007, respectively, for two allotments. The Great Northern also made a stock allotment of 40% in 1907, aggregating sixty million dollars. The Northern Pacific in 1907 made a stock allotment of 60%, at par, aggregating 93 million dollars. The market value of these rights was $20.00 a share. These enormous dissipa- 180 CREDIT tions of assets and securities explain the drop in the line in 1906-1907, when they were at the height of their prosperity; the drop coming before the panic of the following year. The accompanying chart "X" shows the prices on the Southwestern railroad stocks, compared with industrials. The Southwestern stocks are lower. 1 t t / 8 / ! 5 { ! f 1 1 ! x i i 1 ! 0. 1 CI / , 1 0\ ■ t ( 1 c? ■ 2 O III > ) )/ I / B III > / o c8 : — cet-t-oc 00t-rH©t O CO OU3 C t-iniHi-le ©©•«>mc O CO©» OS ot-« © CCOCL 00 rHOO t- cocm in lam i-T inirc t-HC COCOt- t-TH ©t-N ©OOt-t rHooce- o"oot~ ncocc CM CM. 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The Western district, as classified by the Interstate Commerce Commission, roughly speaking, extends from Chicago and the Mississippi River to the Pacific Coast, and from the southern boundary of Canada to Mexico, embracing over three-fourths of the territory of the United States. These railroads as a whole from the Mississippi Valley to the Pacific Coast have been and are now seeking a gen- eral increase in their revenues by various methods. They are decreasing transcontinental rates, and increasing all other rates wherever they are able to do so. Consequently it would probably be fair for the Commission to consider the territory as a whole were it not for the fact that there are extraordinary differences in conditions in one portion of this vast territory compared with another. The differ- ences between Arizona and Illinois are greater than those between New York and Florida. In the present proceeding it is also true that the bulk of the advances are from points located east of the Rocky Mountains. In this territory also there are widely differ- ent conditions in the traffic handled and in the financial status of the railroads concerned. In recognition of this situation, we have divided the territory into three groups, the Northwestern, the Southwestern, and Western Trunk Line, which have been fully described. There have been many changes in the accounting rules and in the policies of the railroads that cannot possibly be critically considered by an arithmetical sum of figures applicable to a miscellaneous list of companies. The meth- ods of accounting differ with different companies; that alone demands a separate analysis of a few representative carriers in the territories we have described, as well as the summaries for a series of railroads serving any par- ticular territory. 192 EARNINGS We will now proceed to state briefly the tendencies of returns on capitalization as a whole, as well as net reve- nues and gross revenues as a whole in these territories. This will be supplemented by a somewhat extended anal- ysis and application of the other tests to which we have referred above. EARNINGS 193 The railroads in the Northwestern group, covered by this table are shown on the accompanying chart. * . o u •t o. * > J «-;cm©coco^« [ **> cm t^ © co tq co©©-"* »-<© I •<*; cm iq 00 00 co, I t^t^ *<»" ^ »o ^ f" tjJ -" -^ eo 10 cd ^"^©cocoad 1 Noiciddoo I os os co t-*" os ao" cot- CMt-©-*© ft©tOCMCO co"t>~^ ."(oto 10 ^j* cm •**< CO CMftiOeDCM ©"co"cO*CM*©* CM ft CM CM ft cocftCMr*o ■**< ft CM ^ CO t*>~os* co*©*cm" CMf« *g«*OCM co^oqcop-^ t"» CO CO CO CO ^ iO COO f« •* -^ ^ *o *o OS — © — < -^ -*• -"(f CO CM t^ 00 00 CM t^-^W3^H«-^ CO t>~^ CO f* o> ~£ ~5 CM © CO tO t~— CO O Ol © o OS CMft C0*O co r- to ** © r- t^OO "* © CO GO 3 00*©* CM* p« co" 00 H ft 01 r- 1^- C0»O W3ioco t» © t"— **• CO © *• oi id a 10 « w ^m f^© t>^CM ft_ CM OOOO COCO eot^co'co-H t-C "*f ft CM f» CO W5 ■^00 CO t*^ CM p c* frost-"* ft" cm t>- CO coo coco OCO COO OS OS CO J CO >0 .O >TPIOO >b-© co f» f< C? 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S - t^~ o c*r»x ■sei— re acre — — — — — ' ?^ — — t- I~ l-~ t~»= e O ~ — x_re_re x S*C*X*x"x~ = s; 3 x X N c: o C: n — c re • «s>s«3ie ^■»=c r~— x OC — -*X«iO re ar = t^ «; re c x r^ c s s c»c*rererere ====== »..»..*-.-. re re « = si = t IS x x re — — cr t-reiere c» re re" »;">= = •=" s? C: = «= = B » cTcTo'-^ioo re O c-> ■«■ B t-- B ;= = =c =c => c* re re »o re a cs « — " x> ci a5 s -B--BB e - - — — x XX S: = ■*• » •*"=:":* — sTe" © c"o» o~ t^ -*sr — cs — r^ =^»o c* te r*- t*- r- t^. s.sssqi — tcr-^rere— • c: rec*c«rec* re £ 8S2SSSSS3 — — 0f — 2^xe : r; x ?; « m t- f^ r* — u~ :- . - Q Q — r* ?* C? ■3 H si' 58 MB ©"— " **«J3*- . £rej = -E5J 3 a «^ Sc-;c — « ■ ^ H -r t- x o r: re re — : re — — — — = .-~ — : =r ~ — re r cnc:-^- ^xissje e re x ^ x c* ! k^ — « -r- c < csrecireci I to e* »-« ei ci ee I e>» re ■* <*'«r •* I » W> ■* .- — — — •= = — =: eVccn net-- • X£3«C cs ic re — r— t^— ocr-^o c»cs tCic re* t>- c^ x ^ ^ cs ret-cs — c"ietCr-~-:• re — x >= v- t~- — ^ ^ r^ t"— C) — M C V =:' t-Tscreo — X t~ ■» "O — t» re" m" —"'• — = re r«N«rert ;xjccn sqniqoio — "re*re"c*i^re = t^X ■«• X — «e re — re -^ ^ to t^t* iff o X re £->r r~ «.- r^ a — — X sc O r^ ^ re 3 3 = a = = NSOKKX ecrerjiex" £ x — — o x — ^ x m o St — = -^-r- = x t^t- x r^ 2 xsxCMe t~*£<5<5*i : o" ~xrci~* x -^* » o c; — t~xot-x I ncsxxx ! — « X — O ^ »C X ?*x Nre^sc^si" — C: r~c=c: x 8"t-raeie— "T eo - S5SSS -SSS^gg 5|:22J 5gg5|l xxxxx j^xxxxx ^5s>SSS fc*S — 2: EARNINGS 199 We have not had the time to make an analysis of the true situation on the Southwestern lines. These are merely surface figures, as given in their reports, without a close analysis. Further, it may be stated that we have not had the time to make a check of our summaries previously given for the Southwestern group, and we do not ask that much reliance shall be placed upon the same for that reason, and especially until a more thorough investigation has been made of conditions in the Southwest. The following tables are similar to those shown in Commissioner Lane's opinion in the Western Eate Ad- vance Case of 1910 and appearing on page 347 of volume 20 of the Commission's reports. Commissioner Lane adopted 4% as the interest rate. Instead of that we took the actual average rate of interest paid last year by each railroad. This made the return on stock slightly lower than it would have been had we taken the straight 4%. We also made a reduction in the net income. Instead of operating income used by Mr. Lane, we made deductions for net rents and lease of roads, which, on each of these four roads reduced the net. The tables are compiled by ascertaining the net operat- ing income per mile for each of these roads and determin- ing the ratio it bears to an assumed valuation of $40,000, $36,000, and that found by D. F. Jurgensen for each road, per mile of single track, by considering, first, that, the total capitalization of the road was all represented by stock ; and, second, that two-thirds of the total capitaliza- tion was represented by bonds. The net operating income used is obtained by deducting from the net revenue for each road each year the expenses of outside operations, taxes and debit balances in the hire of equipment, joint facility, rent, miscellaneous rent, and lease of road accounts and by adding the revenue 200 EARNINGS from outside operations and credit balances in the hire of equipment, joint facility rent, miscellaneous rent, and lease of road accounts. For example, the net operating income of the Chicago, Burlington & Quincy for 1914 is shown to be $2,796 per mile, which makes a return on $40,000 value per mile of 7% ; but if two-thirds of this value of $40,000 per mile had been borrowed at the actual rate paid by the Burlington in 1914 on its total funded debt and the remaining one- third represented stock issued at par, the stock would have earned 12.8%. EARNINGS 201 4) - - k c c « 3 boo £ 5 a o o Jurgen- sen's valu- ation per mile pres- ent cost depreci- ated, in- cluding general expendi- tures qj U O 1 09 03 co-c ^5* 03 o - oj co h "5 fee - e *s ££ is oh « c £2 £h I -•* ~ o 3 J 09 o Og © cd -* E 1 bo a a gl S* ■ 941 a>i o ■ 03 05 O'O'O ^25 i Net Oper- ating Income Per Mile s « kO OOiHCvluo fcS> riH '- | H * # at-cooo -tdoot-' ice* oo jJO HHHH oooiao ■~ so r-i- teeqento r-c©o»o> i-INCO-* i-lr-HHi-l C5 C7> CiCTS OHeoia ■* ci ee •*»«' UiOJCOt- t-«eodt- isoiiao oodcii-J ■*00Ol9 coioc-%; whereas since 1907 they have paid 7% every year. They could have told you their tale of poverty about things going to the dogs ever since 1900; they could have proved it to you by these figures, in spite of the fact that their accumulated sur- plus in 1900 only amounted to $6,900,000; and in 1910, it was $32,000,000. If the rules had been changed in 1902, the year 1900 would still have been the peak year ; if they had been changed in 1903, the year 1900 would still have been the peak year. If the change had occurred in 1904, 1900 would still have been the peak year. Must we conclude that 1900 would have remained the best year, regardless of any other changes in the items of the accounts or in the policy of the carrier? ve ami that fu EARNINGS 211 Here again we find danger in accepting surface figures. If in 1900 the Chicago & North Western Ry. Co. had de- cided to enter upon the policy of raising the standard of their freight car equipment, leaving all other parts of their operating expense upon the same basis, if they had expended as much per freight car in 1900 as they did in 1906 or in 1914, leaving all other items precisely the same, their maintenance allowance would have increased, and their net operating income would have been de- creased by over $2,300,000, making the per cent upon the property investment drop to 7.4%, instead of 8.63%. In that case 1900 would have been exceeded by 1901, 1902, 1903, 1905 and 1906. These facts simply demonstrated that the changes in the accounting policy of the carriers, to which we have referred, are substantial in character, and must be reck- oned with, in any attempt to consider tendencies. Summarizing Mr. Chambers' analysis of the mainte- nance on the North Western, he finds during the years 1913 and 1914, that real maintenance, exclusive of any betterments or improvements, allowing for the increased cost of supplies and labor and allowing for the increased capacity of the car, would have been per freight car mile in 1913 8.38 mills; per passenger car mile, 8.51 mills; per locomotive mile, 6.7 cents, and for 1914 would have been per freight car mile 7.92 mills, per passenger car mile 8.20 mills, and per locomotive mile 6.42 cents. Ap- plying these to the maintenance of equipment figures of those years, we find the excess maintenance amounting to $2,069,860 in 1913, and $2,954,165 in 1914. Applying the basis used in Chambers ' Exhibit 4, page 2, for maintenance of way and structures and adding ad- justment for ties and rails for those years, we find the excess maintenance amounting to $602,352 in 1913, and $1,022,567 in 1914, making a total excess in maintenance (that part of those expenditures devoted to improving the 212 EARNINGS property), amounting to $2,672,212 in 1913 and $3,976,732 in 1914. Crediting net operating income with those sums, we find the net operating income for 1913 to be $23,039,612 and 1914, $23,089,381. Further deducting from book value, allowances for betterments and improvements built out of surplus earn- ings since 1906 amounting to $27,020,656 accumulated to 1913 and $28,427,184 accumulated to 1914 ; the percentage of return on book value in 1913 is 7.75 and in 1914, 7.10 — and no allowance has been made for new construction. The allowances for improvements charged to operating expenses which Mr. Chambers located, constituted only a small portion of the total charges of that character, for the reasons fully stated by him. In 1914, the North Western Railroad issued $8,000,000 General Mortgage Gold maturing in 1987, the net proceeds above all commissions, discounts and expenses being $7,409,000. The yield on this issue was 4.4%. It will be noted that that yield is less than for any manufacturing, public utility or other industrial security issued by any New York or Massachusetts corporations, recorded in the offices of the public commissions of those states. The same year the North Western issued Equipment Trust Certificates bearing a yield of 5V? % this security being due in 1923. No manufacturing, industrial or public utility security were we able to find, of a like character, sold during the same period, at as low a rate. CHICAGO, BURLINGTON & QUINCY. Assuming that the Northwestern territory directly in- volved includes Illinois, Wisconsin, Minnesota, Iowa, North Dakota, South Dakota and Nebraska, the Burling- ton is very representative. 72% of its mileage is located in those states. The Burlington was selected by this Com- mission in the 1910 case together with the Santa Fe as representative of the territory. The Burlington was EARNINGS 213 named by Mr. Boyd and Mr. Wettling as a typical road in this territory. This road in 1913 earned a larger per- centage of net operating income to property investment than in any year in its history, so far as our record goes. The Burlington Railroad in 1913 earned a larger per- centage on capital stock than any other year in its his- tory. It earned the largest percentage on total capital obligations outstanding, of any year in its history. The 1913 dividends of the Burlington were 8%, the largest in its history. The accumulated surplus of the Burling- ton in 1913 amounted to $91,000,000, being the largest in its history excepting 1914. A factor that makes the Chicago, Burlington & Quincy a very good index of earnings under present rates in this territory, is that the property investment has had a gradual growth during its entire period since 1890, the increase for no year being as much as 10%, with only two exceptions, those years being 1899 and 1901; both of which years showed a slight falling off in ratio of net operating income to property investment. The divi- dend history of the Chicago, Burlington & Quincy is given in the following tables : 214 EARNINGS CHICAGO, BURLINGTON & QUINCY. Year Rate of dividend common Rate of interest 1890 4.50 4.50 4.75 3.75 5.00 5.25 4.00 4.00 5.50 6.00 6.00 6.00 7.00 7.00 7.00 7.00 7.00 8.00 8.00 8.00 8.00 8.00 8.00 8.00 8.00 5.20 1891 5.03 1892 5.15 1893 5.21 1894 5.25 1895 5.17 1896 5.16 1897 5.22 1898 5.23 1899 5.15 1900 4.96 1901 5.06 1902 4.76 1903 4.77 1904 4.03 1905 4.33 1906 4.22 1907 4.33 1908 3.90 1909 3.90 1910 4.32 1911 4.05 1912 4.29 1913 4.33 1914 4.18 The annual cash return to the investor in Burlington stocks certainly is no ground for demanding increased freight rates as evidenced by the accompanying table. Paying a dividend in 1890 of 4%% with a dividend in 1914 of 8%; paying interest on debt in 1890 amounting to 5.20% and an average interest in 1914 amounting to 4.18%, there is little ground for complaint, dividends go- ing up and interest coming down. Last year the Burling- ton earned net 16% on its capital stock outstanding in the hands of the public. EARNINGS 215 The accompanying table shows the tendencies in the net revenues of the Burlington. It will be noted that the net operating revenue in 1913, amounting to $31,500,000, is over 100% greater than in 1900; 200% greater than in 1890. It surpasses any previous year in its history. In 1914 the net operating revenue amounted to $30,000,000 and was greater than any other year, except 1913. CHICAGO, BURLINGTON & QUINCY. Year Single track mileage operated Operating revenue Operating expenses Net Operating revenue Total Main- tenance 1890 ... 5,138.82 $28,016,246 $17,304,648 $10,711,598 $ 6,553,611 1891 ... 5,284.27 25,584,120 16,288,833 9,295,287 5,656,794 1892 ... 5,440.74 30,949,795 19,633,653 11,316,142 8,028,025 1893 ... 5,556.21 33,328,147 21,545,502 11,782,645 8,479,377 1894 ... 5,595.58 27,240,889 16,863,331 10,377,558 6,377,344 1895 ... 5,731.82 23,392,993 14,541,485 8,851,505 5,051,079 1896 ... 5,870.48 25,372,965 15,798,860 9,574,105 6.402,314 1897 ... 5,859.70 26,379,964 15,495,833 10,884,131 5,838,700 1898 ... 5,859.70 32,294,782 19,352,514 12,942,268 9,004,801 1899 ... 6,230.93 32,799,049 19,317,492 13,481,557 8,420,727 1900 ... 6,412.48 37,643,138 23,119,092 14,524,046 10,939,912 1901 ... 7,789.46 48,943,253 31,269,527 17,673,726 14,572,018 1902 ... 7,971.13 52,290,131 32,365,094 19,925,037 14,892,009 1903 ... 8,306.75 60,576,508 36,063,619 24,512,889 16,541,682 1904 ... 8,326.16 62,846,447 39,442,050 23,404,397 18,025,741 1905 ... 8,561.64 64,049,402 39,496,209 24,553,193 18,541,341 1906 ... 8,677.02 72,073,772 48,321,472 23,752,300 24,573,701 1907 ... 8,875.07 80,127,986 55,847,189 24,280,797 28,861,322 1908 ... 9,023.65 77,763,356 55,162,492 22,600,864 26,423,338 1909 ... 9,020.82 78,612,629 54,560,998 24,051,631 26,353,188 1910 ... 9,039.97 87,869,517 63,010,965 24,858,552 30,782,627 1911 ... 9,074.84 88,272,208 59,541,926 28,730,282 27,167,416 1912 ... 9,074.10 86,723,068 60,646,949 26,076,119 27,835,063 1913 ... 9,128.51 94,374,486 62,842,891 31,531,595 28.669,078 1914 ... 9,263.86 92,750,934 62,148,398 30,602,536 27,891,314 216 EARNINGS CHICAGO, BURLINGTON & QUINCY. Year Freight revenue including switching Revenue ton miles per mile of road Revenue tons per train mile 1890 1891 1892 1893 1894 1895 1896 1897 1898 1899 1900 1901 1902 1903 1904 1905 1906 1907 1908 1909 1910 1911 1912 1913 1914 $19,849,577 16,821,990 21,838,770 22,882,126 17,202,394 15,116,642 16,788,199 18,658,355 23,885,959 23,094,178 26,791,149 33,680,811 35,778,377 42,520,433 44,127,631 43,708,570 51,027,011 56,222,393 53,552,040 53,205,659 59,281,549 59,123,311 58,960,770 65,390,931 64,100,830 $388,819 311,442 399,395 429,206 334,573 291,779 326,037 336,628 408,369 401,570 469,773 496,997 498,082 586,702 612,710 606,070 726,503 801,666 731,925 733,930 822,474 784,149 845,922 963,074 929,702 $152.22 129.50 150.19 155.00 155.00 150.00 166.00 163.84 163.53 180.01 195.26 200.43 220.52 271.24 284.14 322.27 370.38 394.06 384.26 387.44 381.26 406.33 437.75 483.83 478.57 EARNINGS 217 A very striking example of the reconstruction that has been going on, and the economies that have effected a revolution in railroading among representative companies during recent years is given in the following extract from one of the annual reports of the Burlington to its stock- holders : "The Company has, in the past years, expended very large sums in the reduction of grade and curva- ture, for more and longer side and passing tracks, heavier locomotives and larger equipment, whereby the train load has been very greatly increased. This is to be seen from the fact that in 1901 the freight train miles (including mixed) were 19,314,987, as against 17,554,338 in 1912, or a decrease of 9.1%. During the same period the ton miles increased from 3,871,337,916 to 7,675,979,757, or an increase of 98.3%. In other words, in 1912, fully twice the vol- ume of freight business was handled, with nearly 10% less of freight train miles run to move it." (An- nual Eeport to Stockholders of the Chicago, Bur- lington & Quincy, 1912. Powell Exhibit 1.) The bonds of this company in 1914, as shown on page 5 of Norton Exhibit Volume 1, were sold on the market at a yield of less than 4^%, being less than the yield in 1890 in every instance save one ; in that case it was the same. There has been an increase in the yield on the bonds of the Burlington since 1900, the average being 16.2% as compared to the average increase in government bonds of England, France, Germany and United States of 17.67%, and as compared to the increase in the bonds of the twenty largest cities in the United States, of 31%, compared to Norton pure money rate of 25%. The in- crease in the yield which represents the decline in the price of the bond has been greater than the average on the Northwestern group of railroads. The actual yield last year on outstanding issues has been 4.3% which is 1-10 of 1% less than the average for the Northwestern group of railroads. New issues on the Burlington in 1914 218 EARNINGS aggregated $6,000,000 par, net proceeds being $5,500,000 at a price of 91.7, making a yield of 4.4%. This sale was of the general mortgage bond due in 1958. That yield was the same as new issues of the Chicago & Northwest- ern Eailroad Company; Chicago, St. Paul, Minneapolis & Omaha; slightly greater than the refunding bonds of the Great Western which, of course, has a very small per- centage of bonds outstanding ; slightly less than the Min- neapolis, St. Paul & Ste. Sault Marie. This yield of 4.4% was less than any one of the 25 issues of public utilities and industrials in New York and Massachusetts or the United States Steel Trust, tabulated on sheets number 23 and 24 Norton Exhibit Volume 2, and that yield was less than any of the public utility bonds of New York State, approved by the Commission of the first or second district, or by the Massachusetts Commission, during the same year as shown on pages 35 and 36 of said exhibit, there being 129 of these issues gathered together, com- prising all the issues of all kinds of public utilities com- panies, water, electric light, street railway, gas, telephone, telegraph, light, power, etc., which these three commis- sions in the states of New York and Massachusetts have passed upon last year. The Burlington road has a credit of the very highest in the United States. The Burlington maintenance ex- penditures have averaged per locomotive since 1910 over $3,000 per engine, surpassing any prior period in its his- tory. Likewise its maintenance per freight car during the same period has been greater than any other period in its history. Its maintenance per mile of line has also been greater. ATCHISON, TOPEKA & SANTA FE. The accompanying table shows the tendency of operat- ing revenues on the Santa Fe Railroad. In 1913 we find a net operating revenue of $34,260,000, which was over EARNINGS 219 100% greater than in 1900, and 300% greater than in 1890. Net operating revenues in 1913 were greater than in any preceding year of its history, and greater in 1914 than any other year excepting the year 1913. ATCHISON, TOPEKA & SANTA FE. Tear Single track mileage operated Operating revenues Operating expenses Net operating revenue Total main- tenance 1890 ... 4,582.19 $20,839,294 $12,808,473 $ 8,030,821 $ 4,681,633 1891 ... 4,582.12 23,473,121 15,401,641 8,071,480 5,538,326 1892 ... 4,582.12 25,552,184 16,113,776 9,438,408 6,103,875 1893 ... 4,582.12 27,514,653 17,313,671 10,200,982 6,439,184 1894 ... 4,582.12 21,953,602 15,581,692 6,371,910 5,806,950 1895 ... 4,582.12 19,787,623 15,096,210 4,691,413 5,960,360 1896 ... 4,528.16 20,806,435 14,878,646 5,927,789 6,508,082 1897 ... 4,542.76 22,153,519 15,431,905 6,721,614 7,312,751 1898 ... 4,564.73 25,451,917 16,481,118 8,970,799 7,741,047 1899 ... 4,687.81 26,543,068 16,293,082 10,249,986 7,308,094 1900 ... 4,806.00 30,650,463 17,000,221 13,650,242 7,613,183 1901 ... 4,817.54 34,966,188 18,023,443 16,942,745 7,651,186 1902 ... 4,843.61 37,120,290 19,341,274 17,779,016 8,239,461 1903 ... 4,871.34 38,030,096 22,067,497 15,962,599 10,256,684 1904 ... 5,030.74 41,337,563 24,599,055 16,738,508 11,235,345 1905 ... 5,043.30 41,048,754 26,515,256 14,533,498 13,182,485 1906 ... 5,043.30 47,249,956 29,072,761 18,177,195 14,002,612 1907 ... 6,928.30 75,792,605 45,749,246 30,043,359 21,987,351 1908 ... 7,101.62 75,574,382 47,974,888 27,599,494 22,864,748 1909 ... 7,458.47 76,770,668 45,381,887 31,388,781 21,497,508 1910 ... 7,459.85 86,971,313 55,945,465 31,025,848 26,952,299 1911 ... 7,549.69 89,164,317 56,637,494 32,526,823 26,716,252 1912 ... 8,200.86 89,856,347 57,666,316 32,190,031 26,978,994 1913 ... 8,237.55 98,090,754 63,830,683 34,260,071 31,557,139 1914 ... 8,339.72 93,540,268 60,172,701 33,367,567 28,830,821 We find the man who has put his money into the Santa Fe Company has been faring better in recent years than formerly. Coming out of the receivership but recently the dividend rate in 1901 was Sy 2 %. There has been a steady increase since then until the last five years when it has been 6% annually on the common stock, and 5% annually on the preferred stock. The interest rate has shown a slight increase on the Santa Fe, 1914 being 220 EARNINGS 4.03%. They have not missed their interest, or passed a dividend, in the last fifteen years ' time. ATCHISON, TOPEKA & SANTA FE. Year Rate of dividend, common Rate of dividend, preferred Rate of interest 1890 3.50 4.00 4.00 4.00 4.00 4.50 6.00 5.00 5.50 6.00 6.00 6.00 6.00 6.00 2.25 4.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 3.31 1891 3.38 1892 3.60 1893 3.60 1894 3.64 1895 3.88 1896 2.26 1897 2.70 1898 2.89 1899 2.85 1900 2.85 1901 3.99 1902 3.74 1903 3.98 1904 3.98 1905 3.94 1906 3.89 1907 4.12 1908 3.96 1909 4.34 1910 3.94 1911 3.84 1912 3.97 1913 4.24 1914 4.03 Two facts of striking importance stand out in an analy- sis of this property. At the time of the reorganization $102,000,000 fictitious capitalization was issued, as testi- fied to by Mr. Powell. At the same time the book value or property invest- ment was also exaggerated by the same amount of money. The second fact of great importance is the enormous maintenance charges of recent years. The Santa Fe expended last year in maintaining its locomotives $4,189 EARNINGS 221 per engine. For the same purpose the Burlington ex- pended $3,243; the Great Northern $3,175; the North Western $2,640. The Santa Fe expended in maintaining its passenger cars during the same year $1,144 ; $100 greater per car than the Burlington and twice as great as the North Western. The Santa Fe expended in 1914 in maintaining its freight cars $101 each, or 20% more per car than was expended by the North Western, and that was the highest in the whole history of the North Western, with only one exception, 1907. If the Santa Fe has figured maintenance in 1913 upon the same basis as the North Western did for the same year, the net income of the Santa Fe would have been $5,000,000 greater than it was, or approximately $35,700,- 000. But there was $102,000,000 of property investment or book value created out of nothing at the time of the reorganization. Deducting that amount from the book value of the property for the year 1913, we have left $516,000,000 ; but this sum includes $32,300,000 that has been expended for additions and betterments charged to surplus, aside from other sums that undoubtedly exist, which we did not have time to find. This company, like all others, has been building for the future. During recent years its book value has increased at enormous strides, over $100,000,000 being added since 1907. Mak- ing the same allowance for that factor which Mr. Com- missioner Harlan did in the Southwestern case of 1910, we deduct 20%, we find a return for the Santa Fe on its property investment in 1913 amounting to over 9% in- stead of 4.98% as indicated by its books. The Chicago, Minneapolis & Omaha is not an independ- ent company. It is a part of the North Western system, and any financial analysis of this company by itself is subject to the criticism that you must consider system figures. 222 EARNINGS Their common ownership and management is evidenced by these facts. The following officials, as shown by their official reports on file with the Commission, have the same position in each company: Wm. A. Gardner, president; Sah'l. A. Lynde, vice- president and assistant secretary; Edward M. Hyzar, vice-president and general counsel ; W. H. Stennett, audi- tor expenditures; L. S. Carroll, general purchasing agent ; L. A. Robinson, comptroller ; E. E. Betts, superin- tendent transportation. The executive committee of the C, St. P., M. & 0. has seven members and five of the seven are C. & N. W. offi- cials. The C, St. P., M. & 0. has thirteen directors, and nine of the thirteen are C. & N. W. officials. In Commercial Club of Superior v. G. N. Ry. Co., 24 I. C. C, at page 120, this Commission held that the C. & N. W. and the C, St. P., M. & 0. should be considered one system, for the purpose of computing distances. President Felton of the Great Western is the only executive official of any of the Northwestern group of railroads who took the stand. The Great Western is one of the weak sisters in this territory. It is so weak in character ana»unrepresentative that the president him- self admitted that it was not typical, on cross examina- tion. The Great Western is so unrepresentative in character that it is difficult to discover a mention of it in the West- ern Advance Rate Case of 1910. The Great Western was earning less than 2% on its property in 1910. Neverthe- less the Commission denied an advance in this territory. There are people who earn less than 2% in the grocery business, hardware business and in all kinds of manufac- turing and industrial pursuits, from one end of the coun- try to the other. There are people who earn less than EARNINGS 223 2% in the oil business; yet most of us are willing to con- cede that the oil industry as a whole is profitable. Cer- tainly, this Commission will never set up the Great West- ern as a standard to test the adequacy of the rates in this territory. The Great Western is better today, physical- ly and financially, than it was in 1909 or 1910. The presi- dent of the road frankly conceded this, as stated else- where in the brief. It will be noted that it has been able to maintain its property since 1909 on a higher basis than ever before; maintenance per mile of line being greater ; maintenance per engine being fully 50% greater than for any preceding period of like duration ; mainte- nance per freight car being much higher than for any preceding period. In earlier years there were times when it earned slightly more on property than the last two years. For instance, in 1906 it earned 2y 2 %, but turning over to the maintenance column it will be noted that this maintenance last year was 72% greater per loco- motive, and the maintenance per freight car was over 100% greater, as well as the maintenance per passenger coach. This company has not only been able to maintain its property during recent years at a standard equal to other representative carriers in the territory; but it has been able also to borrow money at as favorable a rate as any other railroad in this territory. The Great Western Rail- road is chiefly a main line proposition joining the termi- nals of Omaha, St. Paul and Chicago, that were already served with a veritable network of main lines and feed- ers belonging to other companies. Any time table of this railroad will show that situation. ^ . - It isjan axiom in modern railroading that a torritlry *r must Qoniai nboth main line connections with great ter- minals, and a system of feeders, in order to successfully meet the competition of other railroad systems in the ter- ritory. There is hardly one railroad in the United States 224 EARNINGS that is successful, which is a main line proposition, with- out a large per cent of feeders, or unless it is a part of a system connecting terminals, which also has a large per cent of feeders. There may be a few exceptions here and there, to the foregoing rule which we have stated, but they are very rare, and because of peculiar circumstances. The Great Western has wholly failed to meet these re- quirements. Concerning his property, the president of the Great Western testified: "Mr. Thorne: Mr. Felton, I understand you to take the position that it was not fair to consider the weak line or the strong line, but the average line or typical line, in order to determine the adequacy of railroad revenues, is that correct ? ' ' Mr. Felton : Yes, sir. . "Mr. Thorne: Would you consider the Great Western a typical line or average line in this terri- tory? "Mr. Felton: No, sir, I would not say the Great Western was an average line. The Great Western is below the average in its returns. "Mr. Thorne: The Great Western was a party to the proceeding in 1910, was it not, to secure an advance in rates ? 1 ' Mr. Felton : Yes, sir. "Mr. Thorne : And the Commission held the reve- nues at that time were adequate f "Mr. Felton: As far as the roads as a whole were concerned. 1 ' Mr. Thorne : Well, do you consider that a proper basis upon which to reach a conclusion? "Mr. Felton: I think that is the basis on which the Commission have always acted, I believe." (tr. 194-195.) The Chicago, Milwaukee & St. Paul Railway Company has had an unfortunate history, with which the Commis- sion is guite familiar. They have repeatedly violated the EARNINGS 225 rules of the Commission in the keeping of their account. The Commission has already had occasion to discuss some examples of that character. During the past seven-year period, upon which Mr. Wright and his associates are laying so much stress, we find the property investment of the Milwaukee has in- creased enormously. The property investment has in- creased 100% since the 1910 decision. As to the character and wisdom of that investment, the operating and finan- cial results of this carrier speak for themselves. As to whether the public shall be compelled to stand the loss, or whether the owners of the property shall pay that loss, is an important question which can only be decided one way if it is decided right, and in harmony with former deci- sions of this Commission and the courts. During this period when the Puget Sound has been largely constructed and improved, the operating accounts have been intermingled as well as the revenue accounts, in the same manner that always becomes possible in con- nection with parent and subsidiary companies, or com- panies having intercorporate relations. This company has included in its property investment, improvements and betterments built out of operating ex- penses and surplus earnings for many years. The 1906 report of this company to its stockholders, shows on page 24 the following entry: Earnings and other income expended for additions and improvements to property $25,617,015.81 ; Over $7,000,000 of that sum being expended out of ac- cumulated surplus earnings which they had on hand that year, 1906. Last year this company had an accumulated surplus of over $43,000,000. It should have been over $50,000,000, and greater than any other year in the history of the company, if their accounts had been correctly kept during 226 EARNINGS recent years. We call your particular attention to the annual report to the stockholders for the year 1911. On page 17 you will find the following entry: Discount, Commission and expenses $25,000,000 debenture bonds of 1909 and 15-year European loan of 1910 $7,768,201.33 In the annual report to stockholders for the year 1913, on page 25 we find the following entry: Discount on General Mortgage 4^% bonds and Extension Milwaukee & Northern Railroad Co. 4y 2 % bonds $1,393,704.65 (It will be noted on the same page there is a debit charge to profit and loss by reason of the acquisition of the ac- counts of the Puget Sound Railway or $1,816,439.00.) In the annual report to stockholders in 1914 you will find the following entry on page 25 : Discount on General Mortgage and General and Refunding Mortagage bonds $898,646.00 (It will be noted on this same page there is an Adjust- ment by reason of the acquisition of the accounts of the Puget Sound amounting to over a million dollars. In those three years, 1911, 1913, 1914, we find discounts aggregating over ten million dollars charged to profit and loss the year they occur instead of being spread over the life of the bonds.) The custom of carriers of charging to renewals and de- preciation, the cost of equipment retired and still keeping that equipment in service, is proved by the entry in the annual report to the stockholders, 1912, on page 33: "These locomotives and cars, dropped from in- ventory when their replacement was provided for by charges to Income Account prior to July 1st, 1907, are still in use, chiefly in train work and con- struction service. It is therefore necessary to re- instate them in the accounts and in the inventory of equipment. The difference between their original EARNINGS 227 cost and their scrap value has been credited to ' ' Re- serve for Accrued Depreciation, ' ' and when they are destroyed or taken down no further charge to Oper- ating Expenses or Income Account will be neces- sary. ' ■ On this page we see this company has put into property investment the total cost new of 60 locomotives and 2,751 cars without any deduction whatever for depreciation, al- though they had been written out of service over five years ago. (The details of this equipment and these facts are given on page 9 of the same report.) Another fact of significance is that this company in- creases its reserve for accrued depreciation almost 100% in one year, this being shown on top of page 11 in 1912 report to stockholders, where it is stated, ' ' At the close of the fiscal year ending June 30th, 1911, there was at the credit of Reserve for Accrued Depreciation the sum of $2,975,310.57." On the same page it is stated that the balance of this account June 30th, 1912, is $5,350,000. Another fact worthy of note is that the operating rev- enues of this company in 1912 declined $1,800,000, but in spite of that fact, this company increased its maintenance by about $1,700,000. The maintenance in 1911 was the largest in the history of this company, both in gross and in per cent of gross revenues (so far as our record shows) with only one exception. That was for the year 1900. If this company had been content to maintain the same per- centage of gross revenue for its maintenance accounts in the year 1912 as it did in 1911, which was 4Ss peak year in the history of the company, being one of the two high- est since the organization of the Interstate Commerce Commission, the net operating income of the Milwaukee for 1912 would have been $15,975,513. If during the year 1912 this company had maintained the same average rate of maintenance to property invest- ment as existed during the seven-year period used as the basis of Mr. Wettling's exhibit, from 1901 to 1907, its 228 EARNINGS maintenance for the year 1912 would have been $13,760,076. Then if we take the property investment as of 1912, excluding betterments and improvements out of surplus earnings, we will have a rate that compares very favor- ably to preceding years. The betterments and improve- ments as stated above, built out of earnings and income up to 1906, amount to $25,617,000, which was formerly $5,000,000 less than the accumulated surplus brought for- ward for the year 1906. In the year 1911 we have the unwarranted decrease in the accumulated surplus of over $7,000,000; because the discount on bonds which should have been spread over the life of the bonds ; but taking the accumulated surplus brought forward as it is shown on the books for the year 1912, amounting to $49,000,000, and then subtracting the $5,000,000 excess which we have found to exist in 1906, it is probably fair to assume that the resulting figure, $44,000,000 represents the betterments and improvements that had been built out of surplus or earnings. Subtract- ing that from the property investment as of 1912, amount- ing to $294,000,000, we have a resulting property invest- ment of $250,000,000. Divide that into operating income. Placing the maintenance on the 1911 basis or placing the maintenance in 1912 upon the average percentage of the property investment which existed in the seven-year period 1901 to 1907 inclusive, we find a rate of return on book value for 1912 which compares very favorably with those of preceding years, notwithstanding the fact that 1912 was a poor year on the Milwaukee, their operating revenues declining more than $2,000,000, compared with the preceding year. It is true the operating revenues are greater than in former years ; but it is also true that book value we have adopted also exceeds that of former years, excluding all betterments and improvements out of surplus. EARNINGS 229 The Commission itself, in the 1910 case, made a some- what extended analysis of the Milwaukee 's operating sta- tistics and of the unreliability of the same, reaching the following conclusion : "An examination of the exhibits furnished by the Milwaukee road satisfies us that we must arrive at either one of two conclusions: (1) That the road is not as efficiently managed as others — a view which we decline to accept; or (2) that its tables do fully reveal their own significance." (Western Advance Rate Case 1910, 20 I. C. C, 307-367.) Again the Commission had occasion to criticise the operating reports of this company in a recent investiga- tion. In view of the remarkable discrepancies both in operating reports and operating policy, and in view of the bad judgment evidently displayed in the purchase of the Puget Sound, we feel justified in adopting either one or two alternatives stated by this Commission in its 1910 decision as to this company, and claim that it cannot be adopted as representative or typical. While the property investment figures and the operat- ing statistics have been subject to the foregoing variable conditions, we find a separation of the actual stocks and bonds outstanding in the hands of the public and the return thereon separated from the computations of re- turns received from the Puget Sound, as well as the securities issued for the purchase and the construction of the said Puget Sound, leaves a very handsome condition for the Milwaukee in recent years. It has been able to meet its operating expenses, pay its taxes, interest on bonds and debt and have a net corporate income which is very large and substantial and fully complies with the test this Commission laid down in its Advance Rate Case of 1910. As to the Minneapolis & St. Louis and Iowa Central lines, we find nothing whatever in this record to justify 230 EARNINGS a different finding than the one stated by this Commission in its decision in the Western Advance Rate Case of 1910, 20 1. C. C, 307, 377. Of the traffic handled by the Northwestern group of railroads, 86% is handled by the Burlington, Milwaukee, North Western, Great Northern, Northern Pacific and Union Pacific. If you exclude the last three railroad just named from the Northwestern group, in that case, the three railroads — the Burlington, Milwaukee and North Western — handled 78% of the traffic handled by the Northwestern group of railroads. INVESTORS IN WESTERN RAILWAY SECURITIES, AS A WHOLE, HAVE BEEN EARNING ADEQUATE RETURNS. (Prouty Test.) The relation between net corporate income and capital stock practically dictates the credit of a company. It is well for the Commission to consider these factors. That relation has more effect than any other item in the ac- counting records, to determine the attractiveness of railway securities. The main proposition, in so far as railway credit is con- cerned, is to make the securities attractive to investors. For these reasons we believe serious consideration should be given to these factors. We will do so, and we will con- sider each of the other methods that have been used by the Commission to consider the adequacy of rates. The public is entitled to demand of our railroad com- panies that they shall meet the reasonable legitimate re- quirements of modern finance and operation; and upon their failure to so do, they are not entitled to the return received by those companies which do meet those require- ments. What is reasonable for one is not reasonable for the other. You are not dealing with an imaginary person who owns a whole railroad system ; you are dealing in a practical, concrete way with people who have invested their funds in railroad stocks and railroad bonds, who are demanding more money from the public. This Com- mission today cannot dictate how a company shall be capitalized, any more than it can dictate how or where a railroad shall be constructed or operated, except that it shall be reasonably safe. But this Commission can de- termine whether a company is entitled to larger earnings 232 RETURN ON CAPITAL for its present services; and in determining that issue you can and should take into consideration how a com- pany is capitalized, how it is located and constructed, and how it is operated. A company failing to meet the reasonable requirements of modern management in fi- nance or operation, is not entitled to the same amount of return as a company which does meet those requirements, and the former company should not be accepted by this Commission as a standard to test the adequacy of rates. In the Eastern Advance Eate Case of 1910 the Com- mission found that the Baltimore & Ohio was able to earn above fixed charges, including interest on debt, and dividends on preferred stock, 7y 2 % on all its outstanding common stock, and this was held to be adequate. This percentage varies slightly with the proportion of com- mon stock to the total capitalization. In view of that fact it should be noted that the percentage of common stock to total capitalization of the Balitmore & Ohio in 1910 amounted to approximately 27%%, using the figures given in the reports of the Commission. The exact language of the Commission will be here produced : ' 'We express, however, no opinion as to the rela- tion between the value and the capitalization of this property. We accept for the purposes of this investi- gation that Capital account as we find it, and cer- tainly the stockholders of the Baltimore & Ohio R. R. Company cannot claim upon this record that this property should be allowed to make earnings in ex- cess of what would yield a fair return upon that basis. 1 ' It should be noted that the dividend upon the pre- ferred stock, $59,000,000 is virtually a fixed charge and ought not properly to be accounted as part of the dividends paid. To every practical intent it is a portion of the underlying liability which must be taken care of before the common stock receives any return." (20 I. C. C, 288.) RETURN ON CAPITAL 233 "If this Company is to preserve its financial in- tegrity upon the basis of its present capitalization and maintain its credit, it is probable that it must be allowed to earn a sufficient amount to pay its interests, its preferred dividends, a dividend upon its common stock, and have remaining a substantial surplus. The credit of the Company cannot be maintained for year after year upon any other basis. • We are of the opinion that the sum remaining after the payment of fixed charges, including as a fixed charge the dividend upon the preferred stock, should be equivalent to between 7 and 8% upon the common stock. It should have sufficient earnings so that it may pay a dividend of 5% upon its common stock and carry 2>4% to surplus or pay 6% upon its com- mon stock and carry 1>4% to surplus. This is upon the assumption that the capitalization does not ex- ceed its actual value." (Id. 288.) In making practical application of the foregoing basis, we will not deduct other income from the net corporate income of the carriers ; this is for the same reason as that expressed by Commisioner Prouty in the case just cited. When considering the Pennsylvania railroad, he stated: "But the Pennsylvania Railroad Company is not merely a Railroad Operator — it is a great stockhold- ing corporation. It holds for example the entire stock of the Pennsylvania Company which controls the Pennsylvania Lines west of Pittsburgh, that stock now being $80,000,000. The total amount of its hold- ings of securities outside of those held in sinking and other funds, according to its report to this Commis- sion for the year ending June 30, 1910, amounted to a par value of $352,933,730. Upon these various se- curities and from other sources it had, during the year 1910, an income of substantially $17,000,000. Presum- ably its capitalization must to a considerable extent have been created for the purpose of acquiring these stocks and bonds, and since no detail is furnished us showing to what extent the capitalization does rep- resent the Railroad property and to what extent the other properties of this Company, it is fair to con- 234 RETURN ON CAPITAL sider in this connection its income from all sources in considering its ability to pay dividends upon its stock." (Id. 292.) The states primarily concerned in this proceeding are as follows: Minnesota, South Dakota, North Dakota, Wisconsin, Iowa, Nebraska, Kansas, Missouri, Arkansas, Louisiana, Oklahoma and Texas. As previously stated, the Supreme Court of the United States has frequently had occasion to consider the adequacy of revenues of all the roads in a given state, or of representative railroads in a given state. Applying the Prouty process to the railroads serving the states named, we find that all the railroads in each of those states have had revenues sufficient to pay all their operating expenses, all their taxes, all their interest on bonds, dividends on preferred stock; and they have had enough left over to equal the percentages on all their com- mon stock outstanding in the hands of the public as is in- dicated in the following tables. In these computations we have used all of the roads, the rich and the poor, with- out any selection, that touch the states in any manner, except roads having operating revenues amounting to less than $1,000,000, because they are not finally reported as yet by the Interstate Commerce Commission for the last two years, the only figures available being those given in the preliminary abstract of the Commission. However, this does not affect the validity of the showing as truly comprehensive, and representative of the territory in- volved; because the roads earning $1,000,000 or more handled over 98% of the traffic in the Western Classifica- tion Territory during the last year, this figure could be arrived at, that being the year 1912. RETURN ON CAPITAL 235 RETURN ON COMMON STOCK OF ALL RAILROADS OPERATING IN STATES NAMED. States 1911 1912 1913 1914 South Dakota 8.93 8.81 7.95 15.10 8.76 18.30 14.52 4.94 3.49 3.46 5.58 2.03 8.31 7.97 8.14 8.55 8.49 8.34 6.50 4.11 2.07 3.05 4.42 1.45 11.52 10.53 10.48 10.92 11.14 10.91 8.47 6.59 3.16 3.81 5.47 1.50 8.86 Minnesota 8.28 North Dakota 8.66 Iowa 9.06 9.31 8.97 Kansas 6.64 Missouri 4.66 0.94 Louisiana 1.74 Oklahoma 3.20 Texas D1.41 D — Indicates figures in red. Authority: Statistical Reports of the Interstate Commerce Com- mission. Tables, page 20, Chambers Exhibit 1. When Mr. Chambers was first on the stand, objection was made on cross-examination to this table on the ground that it included a road that only had 10 or 12 miles in a state, specific reference being made to North Dakota and the North Western Railway. In order to eliminate every objection of that character, Mr. Chambers then compiled this table again, eliminating all railroads operating less than 100 miles in any of the states. This computation produced the following results, and it will be noticed that there is very little change in the situation as a whole: 236 RETURN ON CAPITAL RETURN ON COMMON STOCK OF ALL RAILROADS (OPERATING 100 MILES OR MORE OF ROAD IN EACH STATE NAMED) WHOSE ANNUAL OPERATING REVENUES EXCEED $1,000,000. 1911 1912 1913 1914 9.31 8.19 7.84 8.31 8.90 18.30 16.14 5.54 3.92 5.54 1.51 8.55 7.58 8.31 6.22 8.00 8.34 7.42 4.76 3.26 4.36 0.84 12.15 9.91 10.57 10.26 11.21 10.91 9.31 7.26 3.80 5.47 0.77 10.05 7.63 8.78 8.16 9.68 8.97 7.33 5.23 Louisiana 2.51 3.20 D 2.56 D — Indicates deficit. Authority: Statistical Reports of the Interstate Commerce Com- mission. These facts were testified to on transcript, page 13585. It will be noticed that all of the Northwestern group of states more than fulfill the requirements laid down by the Prouty test. This is not true of the Southwestern group of states, if you disregard that part of Mr. Commissioner Prouty 's discussion where he states, "This is upon the assumption that the capitalization does not exceed its actual value. ' ' This record shows that assumption is not true as to the Southwestern group. Further we have offered very substantial evidence that capitalization in the Northwestern group of states is ex- cessive (and in those states the railroads more than fulfill their requirements, notwithstanding that fact). We did not have opportunity nor facilities to make an extended investigation and analysis of the Southwestern railroads, except as shown by our preliminary survey, given in Mr. Powell 's Exhibit No. 2, which should be supplemented by a critical analysis of representative carriers in that terri- tory. RETURN ON CAPITAL 237 ®s Mt-!et-»Nia» PS •^> 09 i-iootopsooc-e9oo MJ i-J r^ = ■" a d pso«ousoo-**'**'9it— ^« •-TV t- - t- PS*« t- »H 09 i-t C9C9CO :-i ^ pj «*■ Q 1-1 Ml •» 03 « «o us tH tH 00 0) ilvldend on Pre- ferred which hould b paid u» t— ro CO 00 00 00 1- t- te P! d us «o « 9 <0 *r os n CO ■ PS «e jm Cl CJS CO P! i-T »- OS O » M M V. •a M ■ o 09 t~09 «-<*t-* us" i-toa* oc 00 gsco ri oooo 10 lt: u: ■>c«oa ft 5° t- t- i-t_ e» oo 10 L.0 HJ «-t oo" eo M 10 us |H — m m -. m v. • m i pspsoe 00 m ot OrH C71 9* lOooteianoVoioit-" a o- l>l£ «Oo (•t»w«(ot-u:uiCO r" o>t- : t 1 1 1 4 "O c a! a v a «i K 4 o° « "3§ 5s a) cc 00 ■o-o 4) a, CC CSCS 4) 4) c c 4) 4) cgoaffloS"" 0* 0* 0* c - te - "3*5 h£ttac!i£icg~ *> g t<— , Q h u t> - .C.C.C.C.C — t. O C — 4) 4) — - 4) 4) C )OOC *. *- C % S ChPh C *: fcfi O d 1 > c s jC i^ H 3 H E 03 e 4) OS ^J 1 g -1 ei B J= B O OJ«-S ej 4)°. 3 >o 5 «o °S-« o — t, C 4) ""►-so •° X — c-o ♦- 1 B X! :3 C B 3C O ■t-a>HciJHV10 OOMOOOMiniflNNNeOfflMHM o>5C 0ono JOHN 5oa>«o coooiao NOOCOO eootauso sastrx awe 5 00O1C ■oeo ianoo oo oot-ira rHtH-CilOa M lOtOO >o-^o ■ICTIO'* OOOWOCOOO^O oooH»Non»o NWOt-MON^O soooo_ fcTo I - -~ — oocsoi (NNN Ot~0)00»«00«0 Ht-O^COOt«U3HOo 00 iH lfl NO O0 O l 1U3 (-"»«"© i-Tti>" in n ,_!" OOOqt- o 00 N M •<& 'A 9 •£>>5 ooJq o =<> . £c„ « aa< 3) o O-o-h CT m 3-3 « °* "bo^bo^SsC 03 o S£ccoSow<:££kM to 3 _ O °*£ -i id a> - h « a> -- «6 SI ■ ^ ■a oo 3* 4) lM Ri C 4> ~ >>£ O o ,?JcJ 3-3 I +3° Sp en 1 -! i-i »J«9- bo •^ c o." oj-O t. 0) *J d S - a> - bo d fifl ,<-> Ojo V . aj o M "bo 3 4) ►»> a! - S3 s t* 8 u m a J2^3 i— i . c bOcJ 242 RETURN ON CAPITAL In 1913 Western Trunk Lines earned upon their com- mon stock 9.48%. These same railroads, during 1914, a year of depression, earned 7y 2 % on all of their common stock outstanding in the hands of the public. In 1914, if you had included only those lines having one-half of their mileage in the territory, excluding those having over half of their mileage outside of the territory, the Western Trunk Lines earned 7.88%. If you had included only those roads having two-thirds of their mileage inside of the territory, the Western Trunk Lines would have earned 7.97%. The Prouty basis is perhaps as fair a one as can be devised, with one all-important qualification and that is, that the capital does not exceed the value of the property ; and, to the extent that the capital does exceed that value, this test becomes inapplicable, but that makes the test more than fair to the railroads. A justification for this basis that is almost conclusive is that, during ordinary seasons, in the case of a railroad which meets that re- quirement, you will find almost invariably that the bonds are selling at prices amongst the highest of any bonds of that denomination in the market; and, second, that these stocks are selling close to par, or above par. No better vindication of that basis can be asked, than the fact that it is suported by the sober judgment of the investing pub- lic, people who back up their judgment with their money. It is common knowledge that last year was a period of depression and yet, if you take the average market prices of the stocks of all our Northwestern group of railroads, weight them in proportion with the common stock out- standing, as of June 30, 1914, it is found that the average market price for these stocks is 126.5. If you exclude from your list representing the Northwestern territory, the Great Northern, Northern Pacific and Union Pacific railroads, it makes very little difference in the result. In that case the average market price is 125.7. RETURN ON CAPITAL NORTHWESTERN GROUP. 243 Common Stock in hands of public June 30, 1914 Average Market Price June 30, 1914 Chicago & North Western.... Chicago, St. Paul, Minn. & Omaha Chicago, Burlington & Quincy. . . Chicago, Great Western Chicago, Milwaukee & St. Paul. . Minneapolis & St. Louis Great Northern Northern Pacific Union Pacific Minn., St. Paul & S. S. M Total — Northwestern Group. Average market price, all roads, Northwestern Group Total — Great Northern, Northern Pacific and Union Pacific Total — Northwestern Group, excluding Great Northern, Northern Pacific and Union Pacific Average market price. North- western Group, excluding Great Northern, Northern Pacific and Union Pacific 130,117,029 18,556,267 110,839,100 45,246,913 116,850,100 15,205,620 238,668,929 247,944,400 222,291,600 25,206,800 $1,170,926,758 $ 708,904,929 $ 462,021,829 131.3 128.8 210. 12.4 98.2 13.1 123.9 110.1 149.5 122.7 Common Stock Mul- tiplied by Average Market Price June 30, 1914 170,843,659 23,900,472 232,762,110 5,610,617 114,746,798 1,991,936 295,710,803 272,986,784 332,325,942 30,928,744 $1,481,807,865 126.5 $ 901,023,529 $ 580,784,336 125.7 a — Taken from Chambers Exhibit, Vol. b — Taken from Norton Exhibit, Vol 3. c — Bid price. The investors on the market places of the country have given a complete vindication to our claims that this North- western group of railroads is in a prosperous condition. WHEN CONSIDERING THE REASONABLENESS OF RATES, IF THE CHIEF ISSUE IS NOT ONE OF DISCRIMINATION, BUT CONCERNS THE AMOUNT OF REVENUE, THIS QUESTION IS AT THE BASIS OF ALL COMPUTATIONS: DO THE RATES YIELD A REASONABLE RETURN UPON THE PRESENT VALUE OF THE PROPERTY DEVOTED TO THE PUBLIC SERVICE? SUPREME COURT BASIS. The Supreme Court has very clearly established the doctrine described above. These decisions relate almost entirely to state and municipal schedules of rates, because this issue, presented in the pending investigation, is un- usual in interstate commerce litigation. The question of what is a reasonable rate of return is a question of fact for the Commission to determine. The methods of finding whether any given companies are earn- ing a reasonable return is a question of law. Where rates are fixed on the basis of the rates charged elsewhere, under similar conditions, then the value of the property used is not material to the decision. If a commission raises, or reduces, a schedule upon the basis of revenue, then the value of the property becomes the basis. These issues have been passed upon by the courts, and are thoroughly established. Our discussion at this time will relate to the following subjects : 1. Reasonable Rate of Return; and 2. The Present Fair Value of Railroads in This Pro- ceeding. REASONABLE RATE OP RETURN 245 WHAT IS A REASONABLE RATE OF RETURN? A mistake of 1% by you gentlemen in your conclusions as to what constitutes a reasonable rate of return in this case, will be equivalent to a mistake of one billion dollars in the value of the railroads that are parties to this case. (See footnote.) The analysis and investigation of what is a reasonable rate of return is almost as important as the making of the national appraisal of American railroads. It is much easier for the human mind to deal with sev- eral hundred millions of dollars, than it is with y 2 of 1% ; and that simple truth justifies our request that you give most careful consideration to this problem. You are better fitted and better qualified to perform that task, by experience and training, than any other tribunal in this nation. In the Brunswick Water case, several years ago, Mr. Leonard Metcalf, a civil engineer of standing, advanced the thought that a company is entitled to a so-called 1 ' profit increment, ' ' over and above the value determined by considerations of the cost of reproduction, original investment, and the other factors ordinarily named. Mr. Metcalf claimed this profit increment should range from 20 to 50%. In the Livermore Falls Water Works valua- tion, he placed this " profit increment" at 33 1-3%. The counsel in the case, more adroitly, perhaps, allowed for this same percentage; not on the value of the plant, as Mr. Metcalf insisted was the correct method, but by adding it to the ordinary money interest rate in that locality, so as to find "a reasonable rate of return." FOOTNOTE — The total book value of the railroads named in the Com- mission's suspension order in this case is approximately $5,000,- 000,000. If 5% is, in fact, a reasonable return in this industry on the entire property of a railroad, an error of 1% is equal to a mis- take of one-fifth of the whole; it has the same effect on the result as a mistake of one billion dollars in the valuation adopted. 246 REASONABLE RATE OF RETURN While the final figures are identical, the effect on the mind of the two methods used is amazingly different. Mr. Met- calf, in the case referred to, added $21,325 to the original cost amounting to $65,475; while counsel in the case adopted $1.25 as the " ratio of profit to capital cost," using 6%% as a reasonable rate of return, assuming the cost of capital to be 5Y2%. Variations of a fraction of 1% seem so insignificant that we are far more apt to overlook or accept them as approximately correct; while a concrete sum amounting to $21,000 to be added to $65,000 immediately challenges our attention and demands full investigation. Twenty- one thousand dollars ($21,000) looks much larger to the ordinary man than li/4%. Careful and exhaustive discussions in the opinions of our commissions and courts analyzing decimal fractions, will be somewhat of a departure from our legal liter- ature of the past; and yet the commercial demands of modern business are actually forcing that very situation upon courts and commissions. If we have not been accustomed to negotiations for the purchase and sale of properties aggregating ten and fifty million dollars in value, it is impossible for us to form a rational and just idea of what is a reasonable rate on such investments. We must consult those who are making this class of investments. There are two places to go for knowledge as to what is a reasonable rate; one isj&o directly to the financiers who have marketed large blocks of such securities during recent years ; the other is to examine the records of actual prices paid and returns earned upon investments in some well established railway companies. It is probable that this Commission could adopt any rate of return, varying from 2% to 10%, as reasonable; REASONABLE RATE OF RETURN 247 then both the shippers and the railroads would be help- less, and entirely unable to reverse your decision. What is the use of finding by elaborate investigation whether the return is 4, 5, 6, or 7%, unless you also make an intel- ligent investigation of what is a reasonable return ? Ave you going to guess off this latter issue, at random! Each one of us, probably, has a different standard of what is a reasonable rate on investments. There is a standard of more practical value than the opinion of innumerable shippers, or of railroad presidents, who might be placed upon the witness stand. Once more the investor, himself, becomes our witness, and his testimony is again recorded in the reports from the market places. In dealing with this issue it is necessary for a person to disabuse his mind of any personal or preconceived notions that are not the result of actual contact with in- vestments of the character under consideration, either by personal experience or by investigation of the experi- ence of others. What constitutes a reasonable rate of return varies with the hazard and character of any busi- ness. A man owning a government bond is "an Ameri- can citizen," and he is giving his money to the govern- ment to use for public purposes. Has he the right to a return of 7 or 8% ? He cannot get it. Even if the govern- ment paid that rate of interest, they would be in such demand that you couldn't purchase a bond for less than two or three times their par value. The value of the railroad property estimated in the United States census of 1910 was $15,000,000,000. The value of the farm property according to the United State census of 1910, was $40,991,000,000. (Wallace, tr. 4329.) It is true some farms earn 8 and 10%, possibly higher in some portions; on the other hand there are hundreds of millions of dollars invested in farm land earning 3% 248 REASONABLE RATE OF RETURN on their present value, aside from a meager labor wage to the owner. Billions of dollars all over the nation seek investment at from 2Vi to 5%. In 1913 the outstanding public debt represented by public bonds was almost $3,000,000,000. Of this, the prevailing rate was about 2%%. According to the National Monetary Commission, there were in 1909, $5,174,000,000 in the savings banks of the United States; and the average rate of interest paid to the investors was 3.55%. Last year there were ap- proximately ten billion dollars in railroad bonds out- standing in the hands of the public, on which the average rate of interest was close to 4%. The true basis of computation of the average rate of return is not the return paid on the par value of a security, but the yield on the amount actually invested. The stock might be paying 10% on its par value; if the price on the market is 200, the return to the investor is only 5%. REASONABLE RATE OF RETURN 249 The following table shows the yields investors are receiving on their money placed in government bonds. Some of these securities carry with them privileges in addition to the actual money return, which reduces the yield : ACTUAL RATES OF INTEREST YIELDED BY INVESTMENTS IN BONDS OF THE AMERICAN, BRITISH, FRENCH AND GERMAN GOVERNMENTS. U. S. 4's of 1907 and 1925 English Consols 2% and 2%% French Rentes 3% German 3's 1890 2.37 2.58 2.73 2.96 2.72 2.91 3.14 2.73 2.69 2.47 2.18 1.97 1.98 1.99 2.09 2.00 2.04 2.18 2.44 2.52 2.73 2.68 2.67 2.74 2.73 2.86 2.88 2.85 2.81 2.73 2.60 2.49 2.45 2.49 2.57 2.77 2.93 2 ' 92 «/ 2.84 2.79 2.84 2.98 2.91 2.98 3.08 3.17 3.26 3.40 3.33 3.32 3.19 3.09 3.10 3.01 2.95 2.95 2.91 2.93 2.97 2.99 2.98 2.99 3.07 3.09 3.04 3.08 3.18 3.13 3.09 3.07 3.14 3.24 3.47 3.51 3.45 1891 3.52 1892 3.48 1893 3.48 1894 3.31 1895 3.03 1896 3.02 1897 3.07 1898 3.14 1899 3.31 1900 3.46 1901 3.36 1902 3.25 1903 3.28 1904 3.33 1905 3.33 1906 3.42 1907 3.57 1908 3.62 1909 3.54 1910 3.55 1911 3.59 1912 3.74 1913 3.97 1914 3.90 (From Norton Exhibit 3, page 38.) 250 REASONABLE RATE OF RETURN The following table shows actual money earned on in- vestments in the bonds of four representative Western railroads, during the past 25 years : ACTUAL RATES OF INTEREST YIELDED BY INVESTMENTS IN FOUR WESTERN RAILWAY BONDS BY YEARS, 1890-1914. M., K. & T. % C, St. P., M. & O. % C, B. & Q. % C, M. & St. P. % 1890 5.20 5.25 5.04 5.17 5.04 4.76 4.92 4.78 4.57 4.34 4.40 4.11 4.05 4.13 4.06 3.97 4.03 4.24 4.15 4.01 4.07 4.11 4.22 4.43 4.61 4.96 5.06 4.84 4.97 4.63 4.56 4.65 4.28 4.12 3.97 4.09 3.83 3.81 4.09 4.03 3.79 3.97 4.27 4.18 3.95 4.13 4.13 4.25 4.50 4.47 4.53 4.92 4.73 4.94 4.72 4.64 4.80 4.51 4.07 3.47 3.42 3.40 3.50 3.69 3.72 3.61 3.78 4.08 4.04 3.94 4.09 4.11 4.19 4.45 4.29 4.39 1891 4.79 1892 4.49 1893 4.42 1894 4.46 1895 4.38 1896 4.28 1897 3.96 1898 3.83 1899 3.59 1900 3.61 1901 3.59 1902 3.51 1903 3.70 1904 3.68 1905 3.59 1906 3.71 1907 3.95 1908 3.93 1909 3.87 1910 4.01 1911 4.05 1912 4.09 1913 4.30 1914 4.26 (From Norton Exhibit 1, page 5.) We cannot expect investors to place their money in railroad stocks and bonds at the same rate they make on government bonds, or at the same rate they make on deposits in the banks. These facts are stated merely to challenge attention to the situation that there are thousands of millions of dollars in this country seeking investment at around 4V2% or less. One cannot deal fairly with these questions until that fact sinks into his consciousness. You cannot expect people to invest in railroad stocks at the same rate they will invest in government bonds; REASONABLE RATE OF RETURN 251 in the same way you cannot expect people to invest in local gas plants, or electric light plants, at the same rate they will invest in railroads. The reasonable rate of return varies from 2y 2 to 10% on ordinary investments. What is reasonable in one case is unreasonable in another case. How shall we find the reasonable rate on the total value of a railroad property? No person buys or sells great railroad systems in bulk. We don't buy or sell them that way. We buy and sell them by piece meal in the shape of stocks and bonds. To imagine what would be a rate the investing public would consider reasonable, on a railroad property as a whole, requires a flight into the unknown, into the realm of speculations and dreams. In the practical world of today, we must reckon with facts as they are. What is a reasonable rate of return on bonds of repre- sentative railroads is not a matter of mere speculation. That can be very definitely ascertained by investigating the records of the market place, where securities are bought and sold. That has been done in this case ; and it has been conclusively shown that in the eyes of the invest- ing public 4.5% is a reasonable rate of return on bonds of representative railroads. As to what constitutes a reason- able rate of return on railroad stocks, we can also secure information of a very definite and positive character. We might combine these. A reasonable rate of return on stocks cannot be ac- cepted by this Commission as a reasonable rate of return on total value of a property. If you owned the whole plant without any mortgage attached to it; if you had the whole plant supporting the stock, the rate, or yield, would be some amalgamation of the yield on bonds and stocks. It would be higher than the bond yield, and lower than the stock yield. Unfortunately we have to reckon with things as they are. We cannot get the judg- 252 REASONABLE RATE OF RETURN ment of the investors of the nation as to the yield on a purchase and sale of a whole plant like the North Western railroad system, worth several hundred million dollars. People do not buy and sell properties like that, in that manner. They buy and sell them by piece meal, in stocks and bonds. We cannot tell ; nobody else can tell what the judgment of the investors of the country would be as to the reason- able rate of return on the Milwaukee railroad property as a whole. We can very readily find out the judgment of these men as to the reasonable rate of return on the bonds of this company, or on the stock of this company. It is unsound to say that the securities of a railroad company, or any other kind of a company, have to pay annual returns equal to those prevailing in other indus- tries, or equal to the prevailing interest rates in any given territory, in order that the said securities may be attractive to investors. Otherwise, we are told, people will put their money into those other enterprises. This is a very common fallacy, that has been widely circulated and accepted, sometimes by most eminent gentlemen ; but it is a fallacy, nevertheless. What is reasonable in one industry for one security is unreasonable for another. Farms do not earn what other industries earn in the same locality ; and they do not earn an amount equal to the prevailing interest rates in that section. And yet farms are attractive to some investors. Government bonds do not have to pay a return equiva- lent to the prevailing interest rates in the country, or equal to what investments in various industries earn, in order to be attractive to investors. If this government in a handsome, public spirited manner, should resolve, like this Commission is asked to decide as to railroads, that American citizens who loaned this government their hard earned cash, in order to carry on the public work REASONABLE RATE OF RETURN 253 of our National Government, are entitled to receive, and shall receive, a return equivalent to that earned on money invested generally in this country, or equal to the pre- vailing interest rates in the United States. If this gov- ernment did that, from a humanitarian standpoint, in order to render justice to these patriotic citizens; or if we did that because of an imaginary necessity, in order to make our securities sufficiently attractive that we might get adequate funds with which to run our govern- ment — a purpose certainly most laudable, and of the very first importance to the welfare, and happiness, and pros- perity, of all industries — if we pursued that policy, first we would be the laughing stock of all nations on the earth ; and, second, the ordinary citizens could never get a glance at those bonds, unless by the assistance of the police force to keep the crowd back. Any purchaser who bought those bonds from the original purchaser would have to pay such a price that although the bond paid as high as 7%, he could not make 3Y2%. Likewise, the North Western Railroad does not have to pay its unreasonable dividend of 7% to make its stocks attractive. There is no reason why the North Western should be eating up its surplus in that manner. The North Western stock would readily command one hundred cents on the dollar with a 5 or 6% return, like the Penn- sylvania, or the New York Central. North Western stock is today selling around 125. But if this company con- tinues to dissipate its resources by stock allotments below the market price, and by the payment of exorbitant divi- dends, those market prices must go lower. The North Western has given away, since 1903, rights, that are equivalent to stock dividends, aggregating $79 per share. During the same time it has been paying 8% on preferred stock, when 4%% would readily command par, thereby forcing the market prices up to prices ranging from 175 to 190, on their preferred stock. Four to 5% is the prevailing, and usual dividend on preferred stocks in 254 REASONABLE RATE OF RETURN this country. The investors on the market places of this country have " declared in unequivocal language" that the North Western is paying dividends that are greater by from 50 to 100% than is necessary to make their securities attractive to investors. While the" dividends on the common stocks of the North Western last year were 7% ; the prices were so high during that year of depression that you could not buy them on the market and make over 5 1-3% on the investment. While the dividend on the preferred stocks amounted to 8%, prices were so high that you could not make 4%% on your investment. Taking the average interest on all the bonds of the North Western, and the average current market prices on these bonds, the investor could not get these securities at an average price for all of them which would net him over 4%%. (Norton Exhibit 3, page 5.) Not much over one-third of the capitalization of the North Western is common stock; this yielding a return on current quotations of 5 1-3% ; the balance of the capi- talization earning from 4y 2 to 4%% on current quota- tions. With practically two-thirds of the capitalization on a 4%% basis, or less, and one-third on a 5 1-3% basis, it is apparent that the yield on the market value of the entire plant, based on prices fixed by actual investors as reasonable, last year when prices were depressed, was less than 4.9%. During ordinary years this yield on the entire plant would probably be 4.75% or less. It is true that the stockholder may count on more re- turn than the annual dividend, such as the undivided sur- plus, including additions and betterments built and charged to operating expenses, or to surplus. On the other hand, he may consider those surplus earnings as devoted to maintaining the credit of the company, tiding over lean years, building non-productive improvements, such as depots, overhead crossings, etc., and maintaining REASONABLE RATE OF RETURN 255 the returns to the stockholder, over and above these other factors, at the present level, during lean years as well as fat years. In determining what is a reasonable rate of return, a perplexing problem involved will be the proper return on the value of expensive terminals belonging to these com- panies. It will not be necessary at this time to enter upon a discussion of this question. However, we desire to call attention to one precedent from a state supreme court, which is noted in the annals of rate regulation, and which has been cited as an authority as much, if not more, than most of the decisions of the Supreme Court of the United States. In Steenerson v. Great Northern Ry. Co., (69 Minn., 353) the court said: "It is not necessary to determine here what rate of annual income on the cost of reproducing these terminals is the lowest which the court would uphold before declaring the rates fixed by the commission confiscatory. But we are of the opinion, that exclu- sive of taxes, 214% per annum is a liberal income on such cost, and that is as far as it is necessary to go for the purposes of this case. ' ' The reasonable rate of return in one territory will not apply to another. The same is true of different indus- tries. All business has its hard times. A farm which yields a return of 4% or 5% in good times will not yield 1% above taxes in hard times. The promoters of these properties reaped their rewards a generation or two ago. And today, the financier who buys a large block of stock of a poor com- pany, re-organizes it, increases its return 1% or 2%, re- ceives his handsome rewards in the market value of his stock, and cashes it in. The early investors in railway securities reaped ex- traordinary profits, or lost their investments. Those days have come and gone. An advance in freight rates will rarely, if ever, be of any benefit to the persons who 256 REASONABLE RATE OF RETURN first put their money into these properties. A number of these railroads passed through receiverships many years ago. Roads, like the Santa Fe and the Union Pa- cific, have had that experience within the time covered by our exhibits ; and today, those are two of the representa- tive prosperous companies in the territory. Those who have reaped these splendid rewards will be the ones who will further profit by an advance granted to them. The Santa Fe and the Union Pacific constitute remarkable and concrete evidence that properties can recover them- selves completely without the aid of any general advance in freight rates. It has been suggested that if you limit the maximum return, you should guarantee a minimum return. That is not a correct statement of the situation. In ordinary business, competition limits the maximum return; but it is very far from guaranteeing any minimum return. In this industry, competition is practically wiped out, and the government is simply taking its place. There is no effort to reduce the maximum below the limit competition has fixed in other industries ; and railroading should have no favors not possessed by those in other lines of ordi- nary business. When hard times come, those who are interested financially in railroads must suffer with the rest of us. "When times are prosperous, and capital invested in other lines of enterprise is, as a general rule, bring- ing good returns, that invested in the railroad busi- ness brings good returns also. In times of financial stringency, when other classes of commercial con- cerns are doing business at a loss, there is no reason why a railroad company must still make good profits. This system of roads earned large dividends when times were prosperous. If times become again pros- perous, its prospects for making good profits on the cost of reproducing the system are at least as good as the prospects of business concerns generally." (Steenerson v. Great Northern Ry. Co., 69 Minnesota Reports, pages 353-390.) REASONABLE RATE OF RETURN 257 When the Commission held the revenue of the Balti- more & Ohio adequate, finding that company to be earn- ing 7^2% upon its common stock, the earning upon the total value of the property was 5.21%. Considering the fact that at the present time bonds are selling for 4V2%> and they represent ordinarily two-thirds of the railroad value, while stocks of representative companies are sell- ing at the rate of 5% to 6%, the yield on the whole would be less than 5%, consequently the yield of 5.21% on the entire capitalization representative of the whole property must be accepted as very liberal for this class of security. Of the number of farms embraced in the analysis made by Mr. Wallace, if the farmer was allowed an annual wage of $1,000 for his labor, he would have earned less than 1% upon the value of his farm ; if you allow him $600 annually for his labor, he would earn 3.1% on his prop- erty. A digest of this testimony, as well as that of the representative from the United States Department of Agriculture, Mr. Thompson, also Mr. Ray and Mr. Dan- forth, on this subject, is given in the abstract. The investor in railroad stocks has no responsibility whatever in the management of the property. He puts his money into the investment ; and he goes away, leaves it. He comes back a year later, draws his dividend and goes away again. To be sure, it takes ability of the high- est class to manage and efficiently direct the financial and business operations of a great railroad system; but the men who do this class of work get princely salaries, ex- ceeding those of the highest positions in the United States Government held by men with the responsibilities of the nation on their shoulders. And those high salaries come out of operating expenses which the public pays. The capacity and intelligence required of the stockholders in any one of these representative western lines of railroads, consists in the ability to cash a check. When we ascertain the fair value of these properties, 258 REASONABLE RATE OF RETURN we will then know what companies are reasonably and justly capitalized ; then the Prouty test of 1910 will have a sure foundation, in fact. It does make a difference to the public whether rail- roads are properly capitalized. It is just as important to the consumers and shippers of the United States that the railroads shall be properly financed as it is that they shall be properly managed and operated. The division of securities into stocks and bonds is an invention of finance, and the public is entitled to share in the results growing out of that invention of finance. The public must not absorb it all; nor must the railroads absorb it all. There must be some give and take, some dividing up of the profits, following every step of progress in all lines of activity ; and this is one of them. The cross examination of Mr. McCrea, president of the Pennsylvania Eailroad Co., in 1910, by Commissioner Prouty, is very interesting and suggestive in this discus- sion. The following argument was had between the late President McCrea and the former distinguished member of this Commission : "Commissioner Prouty: Do you say you think your company ought to pay 7% to its stockholders or ought to earn 7% on its stock? "Mr. McCrea: I think we ought to pay 7%, sim- ply on the ground and exactly the same grounds that I mentioned — that we have for a long time paid 6%, and our stockholders are as a rule small stockhold- ers ; they are real investors, and there is a very large number of them — women and children in the states. # # # 1 * Commissioner Prouty : I was talking with a man up in my state the other day who had $10,000 to in- vest for a widow whose husband had just died and left that amount of cash. He told me he knew of no place where he could invest that money that would return her over 5%, after the taxes had been paid. Do you know of any investment which would be safe and which would return that woman 5%f I do not REASONABLE RATE OF RETURN 259 ask you to mention the investment, but the nature of it. "Mr. McCrea: I think I can only say that when one is investing a widow's funds, you must always aim at a maximum of security of the principal, even if it brings down to rather a minimum the return of it. My sympathies are with your friend up in your state. I can understand how he was in a pretty hard position. 1 ' Commissioner Prouty : I understand you to say the holders of Pennsylvania stock were entitled to 7%, that stock being held by widows and orphans. What are the widows entitled to who are not fortu- nate enough to own Pennsylvania stock ? "Mr. McCrea: There is no reason why they should not own it. Those widows who own Pennsylvania stock have bought it, not on my advice or the advice of anybody I know, but they have looked over the situation and they have felt it was a good investment. You see, your friend said he could only get, after tak- ink all things into consideration, 5%. The widow and orphan who bought Pennsylvania stock, with the premium on it, I doubt if they are getting on an aver- age, b% on it. "Commissioner Prouty: And if you paid a divi- dend of 10% the widow who bought it on that basis would only get 5%? That being so, if a good secur- ity sells on a 5% basis, why should you pay the stock- holder in the Pennsylvania road more than 5%? "Mr. McCrea: I do not think it does. I think there is justice all around. I think if it is just that the employes should receive a consideration in the matter of increase in cost of living, that certainly the investor who makes it possible for him to be in the service has some right to consideration. "Commissioner Prouty: Do you think the in- vestor in railroad stock is entitled more than the in- vestor in any other security of the same grade, to such a return? "Mr. McCrea: No, sir, I do not know that I do. It is not a question exactly of the rate. It is a ques- tion of what money conditions force on them. ' ' 260 REASONABLE RATE OF RETURN Two classes of people own our railroads — the bond- holders and the stockholders. The reasonable rate on that part of the property represented by bonds is con- clusively proved by Norton Exhibits 3 and 4 to be ap- proximately 41/2% for representative railroads, during ordinary seasons. "With reference to the stocks of the Northwestern group of railroads, we find in the eyes of the investing public that the rate in ordinary seasons approaches close to 5% ; while during the present period of depression it has ranged between 5% and 6%. The Burlington pays a divi- dend of 8%. The last bid on Burlington stock of which public record has been kept in 1914 was 210, the rate ap- proximating 4%. On the Norton Exhibit 3, page 128, these facts are detailed. The Great Western stocks, pay- ing no dividends, sold for 12; but we have no basis to figure the return. The Chicago & North Western, pay- ing a dividend of 7%, sold last year at an average price of 131. The Great Northern, paying 7%, sold at an av- erage of approximately 124. The Minneapolis & St. Louis is a weak sister in the territory, its stock selling at 13. The Minneapolis, St. Paul & Sault Ste. Marie, pay- ing a dividend of 7%, sold last year at an average price of 122. The Chicago, Milwaukee & St. Paul, which has been paying a dividend of 5% for several years, fell slightly below par, selling for 98.2%. This is a reflection of the unfortunate relationship with the Puget Sound. The Northern Pacific, paying a dividend of 7%, sold at 110. The Union Pacific, paying a dividend of 9%, sold at 150. Considering the period of depression that has been growing through the last few years, culminating in the year 1914, as has been so strikingly exemplified by the witnesses who appeared before this Commission, in all other lines of industry that will be affected by these ad- vances, these prices must constitute a very conclusive REASONABLE RATE OF RETURN 261 proof that a reasonable rate of return on railroad stocks, during periods of depression, mr probably close to 5y 2 % ; during ordinary years tti&y ai ' e probably close to 5%. If a given stock is not embarrassed by some intercorporate relationship, or bad management of the directorate of the company — if it is one of these well-established North- western lines of railroad, and has been able to pay 5% to 6% over a representative period of years, the market prices of these stocks have ranged at par or above. Taking all the stocks of our Northwestern group of railroads, weighting them in proportion to the capital stock outstanding, their average price in the year 1914 amounted to 126.5. If you eliminate the Great Northern, Northern Pacific and Union Pacific, the average price was 125.8. This is a remarkable demonstration that the stocks of these companies are worth 100 cents on the dol- lar in the eyes of the investing public, although it is com- mon knowledge that large portions of them do not and never have liiHWjTrepresented bona fide investments in the property. There is not a railroad company in this or any other part of the United States that has paid 6y 2 % or 7% dividends to its stockholders, whose stock ordinarily does not sell at more than 100 cents on the dollar. The rail- roads of this territory are able, easily, to bond their prop- erty up to 65% or 70% of their value. If you could se- cure to these railroad properties a return of 7% on their total values, the stocks will be earning from 10% to 15%, and they will be selling — every one of them — from 150% to 200% of their par value. You will be giving to these railroads more than what the public says is reasonable. The people, who state this, are not interested parties who are trying to keep rates down, or push them up ; they are the investors of the nation, at the market places of the world. 262 RETURN ON VALUE PRESENT FAIR VALUE. In 1903 the Commission objected to Present Value, as interpreted by the Supreme Court up to that time, because of its ambiguity and indefiniteness. In 1905 the Com- mission quoted from its former decision, but qualified its position, stating that Present Value may be a fair test where the total revenues of a carrier were involved, or a schedule of rates instead of a single rate was under con- sideration. The Commission has confirmed that doctrine in the Eastern and Western Advance Eate Cases of 1910, 20 I. C. C., 243, 275 ; 20 I. C. C, 307 ; also in the Five Per Cent Case, 31 I. C. C, 351. The Supreme Court has positively endorsed and thor- oughly committed itself by a long line of decisions to Present Fair Value as being the correct basis to adopt in such computations. WUlcox v. Consolidated Gas Co., 212 U. S. 19. KnoxvUle Water Case, 212 U. S. 1. Minnesota Rate Case, 230 U. S. 352, 454. Smyth v. Ames, 169 U. S. 466. San Diego and Town Co. v. City of National City, 174 U. S. 739. Steenerson v. Great Northern Ry. Co., 72 N. W. Rep. 713, 715. Griffin v. Goldsboro Water Co., 122 N. C. 206, 211, 30 S. E. 319, 320, 41 L. R. A. 240, 242. San Diego Land & Toion Co. v. Jasper, 189 U. S. 439. Cotting v. Godard, 183 U. S. 79. Stanislaus Co. v. San Joaquin & R. R. C. & I. Co., 192 U. S. 201. The true doctrine was announced by the eminent Jus- tice Harlan in the celebrated passage from the case of Smyth v.Ames: RETURN ON VALUE 263 "We hold that the basis of all calculations as to the reasonableness of rates to be charged by a corpora- tion maintaining a highway under legislative sanction must be the fair value of the property being used by it for the convenience of the public." (Ibid. 169 U.S.) As the Commission well knows, this decision has be- come one of the most important and firmly established precedents in our system of law relating to the regula- tions of public service corporations. In not one decision, down to this date, has the Supreme Court ever retracted from the rule stated in Smyth v. Ames. It has been repeatedly adopted and followed as a precedent in state, federal and supreme courts, and by state railroad and public service commissions all over the United States. There is no rule more firmly estab- lished than this one in American jurisprudence. This Commission has frequently recommended to Con- gress that a valuation of American railroads should be made; and finally Congress has given the authority and facilities to perform that task. Realizing the vast possi- bilities resulting from the results of your work, American railroads have combined in one concerted effort to come- pletely forestall that possibility, to make the national ap- praisal of American railroads worthless for any purpose, except to see how high rates can go. It would be as if a city had given a council authority to value a gas plant, and just about when the city commences its appraisal, the council should declare that the rates should be advanced. rf Are these railway companies earning sufficient revenue 1 How can you answer the question in the negative until you have some basis to work upon ? The railway companies themselves have chosen to make that the issue in this case. The decisions of the Supreme Court declare what methods you must pursue, and what 264 RETURN ON VALUE facts you must determine, when that issue is fairly pre- sented. These decisions tell you that the fair value of the properties devoted to the public service shall constitute the basis for all your computations. In this case we have evidence of the present value of large portions of the principal railroads in this territory. These valuations have been made by state commissions, being arrived at by elaborate investigations, covering a long period of years. The methods used in the various states differ somewhat ; but, aside from the allowance for so-called ' ' land multiples, ' ' it will be found the margin of difference is not so large but what use can be made of them for our purpose; for instance, every state in the group shows that the present capitalization of these rail- roads exceeds their present value. We also have valuations made by Mr. Jurgensen, of these same railroads, reduced to a common method, or basis. So far as this record is concerned, these state valuations constitute the only evidence upon which the Commission can reach its conclusion as to the values of these prop- erties, aside from the testimony of Mr. Jurgensen. These state valuations were not offered by the State Commissions; they were offered by the chief counsel for the railroads (tr. 13961), Mr. C. C. Wright. They were of- fered for the purpose of offsetting valuations testified to by Mr. Jurgensen. Those are the two alternative valua- tions that we have for the railroads of the Northwest. There is one qualification of the foregoing statement. Mr. Felton of the Chicago, Great Western, testified that there had been a valuation made by his company, the Great Western Railroad. In order to test the correctness of that valuation (which we seriously dispute by the other evi- dence offered), we attempted to find out the methods of arriving at that valuation. Mr. Felton plead ignorance of the subject, but said that later an engineer would be pro- RETURN ON VALUE 265 duced who could be cross-examined. At a subsequent date Mr. Delo was offered as the engineer for the purpose of cross-examination as to the valuation of the Great Western. It quickly developed that this gentleman knew nothing about the valuation, did not know how many men were employed in the work, or how long it took, and could only state that he simply found the notes of the work amongst the files in his office when he was employed by the Great Western, which was after the valuation had been completed, (tr. 4121.) SUMMARY OF THE VALUATIONS MADE BY STATES OF MINNE- SOTA AND WISCONSIN. Present Value Capitaliza- tion Out- standing in hands of public appor- tioned on basis of Main Roadway Owned Book Value Minnesota (1914) $277,520,366 288,179,030 $411,772,496 353,934,294 $432,310,019 Wisconsin (1913) 364,997,588 Total $565,699,396 $765,706,790 $797,307,607 (The foregoing is taken from Jurgensen Exhibits 26 and 9, showing Wisconsin figures, and Jurgensen Exhibits 10 and 27, showing Minnesota figures. In the case of Wis- consin, capitalization and book value are for the year 1914 and the present value for 1913. Investigation shows slight changes. Figures are substantially comparable according to Witness Jurgensen. We have used the Wisconsin present value just as found by the State Commission, in- cluding what Mr. Jurgensen says is the multiple on land values. For Minnesota, we have used the present value as found by Mr. Jurgensen, including general expenditures. We have taken the book value for each case as the carriers give it, without allowing for depre- ciation; and we have only used interstate railways in- volved in this proceeding.) 266 RETURN ON VALUE The summary we have given above is the actual valua- tion of twenty-two interstate railroad properties, having a capitalization of over $700,000,000, which has been made by the railroad commissions of these states. The net results show that the capitalization outstanding in the hands of the public exceeds the present value of the rail- roads in Wisconsin and Minnesota by $200,000,000. It may be of interest to note that the average present value per mile was found to be $36,751 in Minnesota, ac- cording to Mr. Jurgensen's valuation, bringing Morgan's valuation down to date and correcting it in harmony with the states' valuation, if we include general expenditures; and $35,433, excluding general expenditures, under the Commission 's classification. This valuation for Minnesota is that made by the pres- ent Chief Engineer for the State Railroad and Warehouse Commission. The valuation for Wisconsin is the one made by the State Railroad Commission of that state. The present value as found by the Wisconsin Commission, in- cluding its land values, just as found by the Commission, amounted to $43,219 per mile. In the Wisconsin valuation, Mr. Jurgensen testified they had included a multiple on land, and gave in evi- dence a letter to be found in our abstract of the record. Eliminating that factor it reduced the present value for the Wisconsin railroads approximately $18,500,000, or $2,900 per mile. In the foregoing table we have given the Minnesota figures, including general expenditures, which is contrary to the holding of Mr. Jurgensen. Had we adopted Jurgensen's valuation, excluding the gen- eral expenditures, as he testified right and proper, the total valuation for Minnesota would have been reduced by $10,000,000, making a total present value of $267,570,853, or $35,433 per mile of main roadway. In the above table, it will be further noted that not only the capitalization exceeds the present value of all the RETURN ON VALUE 267 railroads in Wisconsin and Minnesota by $200,000,000, but the book value, or so-called property investment, upon which the railroads are claiming a return in this case, also exceeds the present value of the said railroads in those two states, as found by the state authorities, by over $200,000,000. These figures are the undisputed, uncon- tradicted record in this case. It is thought that these figures should have a more real significance than offhand opinions of railroad officers, or shippers, as to the actual relations between property investment, capitalization and present values of railroads in this country. It will be noted that by the Wisconsin valuation, the capitalization exceeds the present value in every instance except two. It will be further noted that the excess capi- talization for the Wisconsin railroads amounts to $65,- 750,000. The excess capitalization for Minnesota, we find to be $134,250,000, according to Mr. Jurgensen's valuation. The two exhibits showing the present value in Wiscon- sin, excluding the so-called land multiple, and the valua- tion in Minnesota, omitting the general expenditures, as described in the footnote above, are shown on the follow- ing exhibits, being Jurgensen Exhibits 26 and 27. Lt>8 RETURN ON VALUE STATEMENT COMPARING WISCONSIN VALUATION OF JUNE 30, 1913, OMITTING MULTIPLE ON LAND VALUE, WITH CAPI- TALIZATION AND JURGENSON'S VALUATION OF JUNE 30, 1914. Name of Railway Capital Stock & Funded Debt held by public basis of main line owned "Wisconsin present value as of June 30, 1913 Jurgensen's present value as of June 30, 1914, omitting III General Expenditures Chicago, Burlington & Quincy Chicago, Milwaukee & St Paul Chicago & North Western. Omaha Duluth, South Shore & At- lantic Great Northern Illinois Central Northern Pacific Minn., St. Paul & Sault Ste. Marie Wisconsin Central Total Capitalization in excess of Valuation Per Mile of Main Road way (6,685.06) Capitalization in excess of Valuation $ 7,364,533.00 105,227,911.00 98,364,415.00 32,092,546.00 7,754,094.00 2,140,028.00 11,824,721.00 9,391,788.00 17,362,712.00 62,411,546.00 $ 14,635,677.00 76,539,390.00 93,305,672.00 28,265,149.00 2,030,892.00 8,285,839.00 2,546,553.00 4,438,981.00 12,943,779.00 26,682,108.00 $353,934,294.00 52,944.00 $269,673,040.00 $ 84,261,254.00 40,339.00 12,605.00 $ 13,384,142.00 63,709,628.00 80,929,891.00 25,481,140.00 2,089,270.00 7,287,438.00 2,254,543.00 3,778,347.00 11,956,539.00 23,011,719.00 $233,882,657.00 $120,051,637.00 34,985.00 17,959.00 ♦Figures taken from Column 7 of Jurgensen Exhibit 23. ♦♦Figures taken from Column 26 of Jurgensen Exhibit 23. RETURN ON VALUE 269 STATEMENT SHOWING CAPITALIZATION AND VALUATION IN THE STATE OF MINNESOTA AS OP JUNE 30, 1914. TAKEN PROM JURGENSEN EXHIBIT NO. 10. • Capital Stock & Funded Debt held by public basis of main line owned Name of Railway ^-^urgensen's^? of Jirire "3U, iyi4, omitting III Gen 1 ! Expenditures C, B. & Q $ 762,860 32,551,598 72,012,884 29,800,774 13,583,182 17,868,377 1,137,529 116,516,878 17,630,333 41,291,051 66,873,009 1,744,021 $ 2,147,116 C, Gt West 11,982,472 C., M. & St P 43,674,832 C. & N. W 14,969,594 C, R. I. & P 6,417,916 C, St. P., M. & 18,213,297 D. & Sioux City (I. C. lessees) Gt. Nor 537,719 76,104,025 M. & St L 10,002,627 M., St P. & S. Ste. M Nor. Pac 31,572,811 49,917,530 Wise. Cent 2,030,914 Total 1411,772,496 * 54,530 $267,570,853 $144,201,643 35,433 19,097 Capitalization in excess of Valuation Per Mile of main roadway (7,551.26) Capitalization in excess of •Figures taken from Column 7, Jurgensen Exhibit 10. ••Figures taken from Column 26, Jurgensen Exhibit 10. 270 RETURN ON VALUE In addition to the foregoing we have of record the valu- ations found by Nebraska and South Dakota. The pres- ent value of Nebraska railroads amounts to $245,877,934, or an average of $40,093 per mile for that state. This exhibit was introduced by Mr. C. C. Wright, gen- eral counsel for the railroads in this proceeding. The present value per mile of line, as found by the Ne- braska Commission, according to the evidence introduced by Mr. Wright for the different interstate railroads in this case were as follows: (Nebraska) Name of Railway Present Value Per Mile of Line As of June 30, 1911 Chicago, Burlington & Quincy $36,348 Chicago & North Western 28,849 Chicago, Rock Island & Pacific 33,697 Chicago, St. Paul, Mpls. & Omaha 27,065 25,928 St. Jos. & Gd. Island 19,636 Union Pacific 70,525 RETURN ON VALUE 271 In South Dakota, the present value of all the railroads, as found by the South Dakota railroad appraisal as of 1910, amounts to $84,999,424, making an average value per mile of line $23,345 in that state of interstate rail- roads involved in this proceeding. The values per mile of line of each of these railroads in South Dakota, as shown by the exhibit, amounted to : (South Dakota) Name of Railway Present Value Per Mile of Line As of June 30, 1909-10 Chicago, Burlington & Quincy $49,819 *21,438 Chicago, Milwaukee & St. Paul 24,019 Chicago, Rock Island & Pacific 20,761 Chicago, St. Paul, Mpls. & Omaha 25,964 Dub. & Sioux City (111. Cent.) 40,195 Great Northern 20,465 Minneapolis & St. Louis 19,592 13,452 13,260 "Soo" Line South Dakota Central ♦Includes Chicago, Milwaukee & Puget Sound Ry. The valuation in the state of South Dakota by the South Dakota Commission, was not introduced by that commission, nor by the state commissions in this case. As previously stated, the foregoing values were intro- duced by Mr. C. C. Wright on behalf of the railroads. These constitute the undisputed, uncontradicted record in this case, except as it has been stated by Mr. Jurgensen that the values are too high as stated, and for the reasons he gave while on the witness stand. In addition to the above, Mr. Jurgensen made a very elaborate analysis of the present value of the railroads in Michigan, Wisconsin, South Dakota and Nebraska, reduc- ing them to a common basis, which Mr. Jurgensen held is right. We will not undertake to discuss this work. It will be covered by a separate brief prepared by the State Railroad and Warehouse Commission and the Assistant Attorney General of Minnesota. 272 RETURN ON VALUE In this compilation, Mr. Jurgensen has used the basic figures compiled by the various states, combining them on a uniform basis. One of these valuations by state commissions was made in 1900 ; the one in Michigan. We are not especially concerned with Michigan values, for they affect our Western railroads very slightly. Mr. Jurgensen endeavored to bring the various state valuations down to date as far as possible. There were some criticisms of his work which will not have any large or substantial effect on the final results. Suffice it to say that Mr. Jurgensen 's valuation of twenty-five railroads serving these five states, shows a total present value, in- cluding general expenditures, of $937,000,000, or $32,330 per mile. The present value, excluding general expendi- tures, amounts to $900,000,000, or an average of $31,082 per mile. The capital stock and funded debt of these railroads apportioned on basis of main roadway owned, outstand- ing in the hands of the public and not held by the railway company, amount to $1,459,000,000; and the property investment, or book value, of the road and equipment of these same companies, as shown on their books, aggre- gates $1,489,000,000. It will be noted that there is only about a two per cent variation between the so-called property investment, or book value, and capitalization outstanding ; further, that the book cost exceeds the capitalization. The capitalization and book cost of these properties exceed the present value, as found by Mr. Jurgensen, by more than $500,000,000, whether you include, or exclude, the three general expenditures. It has been suggested by counsel for the carriers that these state values are not comparable to present values in those particular states, because of the increase in land values. It is doubtful whether an increase in land values RETURN ON VALUE 273 will justify an advance in rates. It may justify increas- ing revenues by other methods. This thought was very forcibly stated by the Commission in its Western Advance Rate Case of 1910. We will not repeat. The same thought was suggested, but no final conclusion adopted by Mr. Commissioner Harlan in the decision in Texas Railroad Commission v. Atchison, Topeka & Santa Fe, 20 I. C. C. 463. However that may be, whether the railroad is entitled to the unearned increment, or not, as a justification for an advance in freight rates, the valuation as of 1913 in Wisconsin, and the valuation brought down to date by the Chief Engineer in Minnesota, constitutes quite con- clusive evidence as to the relation between capital and value, on a representative group of the strongest roads in the Northwest, that have been notoriously improving and building up their properties in recent years. This objection as to increased land values does not have force as to these computations, because they are of recent date. Mr. Jurgensen is the chief engineer for the Minnesota Railroad & Warehouse Commission. He was the assistant engineer at the time of the trial of the Minnesota Rate Case, at which time Mr. Morgan was the chief engineer. Mr. Morgan, in making the valuation of Minnesota rail- roads, in which he included the severance damages occa- sioned by the purchase of land for railroad purposes, al- lowed this item, not only for land actually purchased where such expenditures were actually made, but he cre- ated out of his fertile imagination, a multiple which he applied to all the land the railroads owned, whether bought for a nominal sum, or given to the railroads, or acquired, through condemnation; thereby, not only giv- ing the railroad valuation, including the present value of its property, but also including all expenses incurred by the companies in addition to that present value, and also a fictitious expense that is not a part of the present value 274 RETURN ON VALUE and is not a part of any expenditures the companies have ever incurred in their history. The allowance for ficti- tious severance damages of that character, was repudi- ated by the State Railroad & Warehouse Commission of Minnesota ; although Mr. Morgan was their leading wit- ness on value. Later the gentleman resigned from his position with the Minnesota Commission to become a rail- way official, and Mr. Jurgensen became his successor. The Supreme Court of the United States also repudi- ated the position taken by Mr. Morgan and by the rail- roads. There were various other important modifications of the Morgan valuation. Mr. Jurgensen has had many years' experience as a civil engineer; he was employed by the County Surveyor of Hennepin County of Minnesota two years, assistant engineer for the city of Minneapolis for one year, assist- ant engineer of the Minneapolis & St. Louis Railroad one summer, employed in engineering department of the Minneapolis, St. Paul, Sault Ste. Marie Railway Company one summer, employed in the engineering department of the Chicago, Great Western Railroad for eight years, and has been in the employ of the Railroad & Warehouse Com- mission of Minnesota for eleven years, (tr. 5058, 5059.) In Mr. Jurgensen 's consolidated valuations, he has been able to cover a very substantial portion of the mile- age of several of the railroads. That is of much more sig- nificance than a small per cent of the mileage valued, because that might not be representative at all of the rail- road as a whole. For instance, on the Illinois Central he only had 4% of the mileage covered by the valuation. Mr. Wright called attention, on cross-examination, to some comparisons between so-called preciated present cost, as found by Mr. Jurgensen, and the depreciated present cost. While on the stand at a later date, the witness testified that his use of the expression "preciated present cost" was practically synonymous with the expression "repro- RETURN ON VALUE 275 duction new," while the " depreciated present cost" was practically synonymous with the term " present value." An examination of Mr. Jurgensen's exhibit No. 13 will disclose the fact that in almost exery instance where the present values were secured f orm% or more of the mile- age of any property, the capitalization and the book value of the said properties was largely in excess of the present value. The foregoing valuations, which we have been discuss- ing, are the only ones that are a part of the record in this case. Mr. Wright, counsel for the railroads, offered the state valuations and used Mr. Jurgensen as his witness. Both sets of valuations prove substantially the same thing. Serious objection was made because of Mr. Jurgensen's appraisals of land. In that connection, however, it will be noted that the dates of the valuations made by the states are as follows: Wisconsin, 1913; Nebraska, 1911; South Dakota, 1910 (or 1909), and Minnesota, made by Jurgensen, 1914. Whatever may be the conclusion as to Michigan, it can be fairly stated that there has been no substantial advance in land values since 1910, 1911 and 1913. In these states, it is probable that land has declined recently, as testified to by the witness. This would offset, to a very substantial extent, any increase occurring in 1911 or 1912. Apportioning capitalization upon the mileage basis tends to spread the capitalization out equally over the system; and their valuation by state boundaries concen- trates the value of terminals in the said states. This must be borne in mind in considering the significance of any total as of the amount above. It will be noted, however, that large terminals of many of these railroads are lo- cated in Nebraska, Minnesota and Wisconsin. Therefore, taken as a whole, the comparison may be considered fair. In those instances where there is a very short mileage of 276 RETURN ON VALUE main line that is valued, or large terminals are included, the values would exceed the average for the system. In the two states of Minnesota and Wisconsin we have very large terminals. The largest terminals on the sys- tems of the Great Northern and Northern Pacific, are lo- cated in the State of Minnesota. In the Minnesota case it was found that 75% of the land values in Minnesota be- longing to one of its principal railroads was located in three cities, Duluth, St. Paul and Minneapolis. Those large terminals are included in the present valuations given above. Probably the most significant figures to be remembered in the foregoing summary are, first, that present value per mile of line, as found by Mr. Jurgensen for all of the inter- state railroads in these four states, having a present value of $900,000,000, averages per mile of line $31,000. Second. That the present value of all the interstate railroads involved in this proceeding, in the state of Min- nesota, as found by the Chief Engineer in the employ of the State Eailroad & Warehouse Commission, amounted to an average of $35,433 per mile. Third. That the present value of all the interstate rail- roads involved in this proceeding in the state of Wiscon- sin, as found by the State Railroad Commission of that Commonwealth, as of June 30, 1913, and including the so-called land multiple, averaged $43,219 per mile, and excluding the so-called land multiple, averaged $40,339 per mile; and the capitalization in the said state exceeded the present value. The railroads are industriously trying to spread the sentiment throughout the United States that the outstand- ing capitalization of American railroads is no greater than the present valuation of their properties. That may prove to be correct; it will depend upon the methods adopted in making that valuation. So far as the west- ern railroads are concerned, the fallacy of any such con- RETURN ON VALUE 277 elusion is conclusively demonstrated by the foregoing facts which we have outlined. If we adopt the valuations per mile of line found by Mr. Jurgensen for the interstate railroads involved in this proceeding, we secure the following returns per mile, as indicated, in 1914: FOR YEAR ENDED JUNE 30, 1914. Net Operat- ing- In- come Per Mile Return on basis Jurgensen's per mile valuation as of June 30, 1914 Railroad Co. All Stock % Two- thirds Bonds % One- third Stock % Jurgen- sen's Valua- tion Per Mile; Present Cost De- preciated including General Expendi- tures C, B. & Q $2,796.00 2,346.00 2,738.00 2,300.64 3,134.88 3,945.05 5,261.07 1,387.94 1,018.75 1,260.41 8.0 7.7 8.6 6.70 8.32 8.43 9.17 4.66 3.32 4.03 4.18 4.30 3.98 5.3 4.3 3.7 4.1 ♦4.0 4.3 4.0 15.5 14.5 17.8 9.5 16.4 17.9 19.3 6.0 2.3 4.1 $35,142.00 30,483.00 C. & N. W C, M. & St. P C, St. P., M. & 0.. Great Northern .... M., St. P. & S. S. M. M. & St. L 31,844.00 34,348.06 37,657.69 46,784.76 57,357.06 29,804.67 30,661.39 C. G. W 31,270.07 ♦Actual rate not available — assumed this figure as being about the average for roads in this territory. 278 RETURN ON VALUE Adopting the average value for each railroad, as de- termined by the state valuations, which have been made, we find the following: FOR YEAR ENDED JUNE 30, 1914. Net Operat- ing In- come Per Mile Return on Basis Present Value** as found by States (Per Mile) Railroad Co. All Stock % Two- thirds Bonds % One- third Stock % Present Value Per Mile 1st Main Track Owned C, B. & Q $2,796.00 2,346.00 2,738.00 2,301.00 3,135.00 3,945.00 5,261.00 1,388.00 1,019.00 1,260.00 7.1 6.7 7.7 6.28 8.17 8.28 7.46 4.36 4.18 4.03 4.18 4.30 3.98 5.3 4.3 3.7 4.1 *4.0 4.3 4.0 12.9 11.4 15.2 8.2 15.9 17.4 14.2 5.1 3.9 4.1 $39,466.00 C. & N. W 35,171.00 C, M. & St. P C, St. P., M. & 0... Great Northern .... Union Pac M., St. P. & S. S. M. M. & St. L 35,432.00 36,643.00 38,375.00 47,669.00 70,525.00 31,825.00 24,388.00 C. G. W 31,270.00 ♦♦Present value here used is taken from original valuations of the railroads named herewith in the states of South Dakota, Nebraska, Minnesota and Wisconsin for the years when the valuations were made. ♦Actual rate not available — assumed this figure as being about the average for roads in this territory. In connection with this, attention is called to the fact that 89% of the traffic handled by the Northwestern group of railroads is handled by the C, B. & Q., C. & N. W., C, M. & St. P., C, St. P., M. & O., Great Nor., Nor. Pac. and Union Pac. If you exclude the last three from the North- western group, then 83% of the traffic of the balance of the railroads is handled by the C, B. & Q., C. & N. W., C, M. & St. P. and C, St. P., M. & O. RECAPITULATION. The level of freight rates on the western railroads in- volved in this proceeding are already from 20% to 60% higher than those on the railroads in Official Classifica- tion Territory, Central Freight Association Territory, or Southern Classification Territory. This Commission should find that the credit of western railroads, as a whole, is as good or better than that of companies engaged in any other line of business in the United States. The result of such a finding as that will simply add strength and stability to these securities, and will be of much more intrinsic worth to the companies involved than an order finding these railroads in bad financial condition. It has not been necessary for us to parade glaring, sen- sational incidents of high finance or questionable acts. It is a business proposition. The present movement for increased freight and passenger rates involves a large sum of money ; not just at one time, but every year, now and in the future, for this and future generations to pay. The impression has been given that railroads have not been able to maintain their properties during recent years ; that they have been compelled to retrench so se- verely that the public has been injured, as well as the railroad properties. This is true as to some railroads; but this record shows that it is absolutely untrue as to western railroads, as a whole, and this Commission should so find. As in all business, there are temporary periods of de- pression when the railroads as a whole, including both the 280 RECAPITULATION strong and the weak lines, are compelled to retrench in their expenses for a time. It has been conclusively proven that these western carriers expended in 1914 in main- taining their properties, $2,800 per mile, which was greater than in any other year in their history except one, 1913. It has been proven that the railroads in Western Ter- ritory, as a whole, have actually expended in maintain- ing their properties, during the past five years, an aver- age of $50,000,000 a year more than for any preceding five-year period since the first railroad was built in this Territory. Every railroad witness who took the stand admitted, on cross examination, that they were maintain- ing their properties at a higher standard during recent years than ever before. Certain financial journals have been saying : ' ' Give the railroads an increase in freight rates and they will help everybody in this period of depression." We wonder if it ever occurred to them that the simpler way to help these people would be to let them keep their money, in- stead of taking it away from them. The method sug- gested by these organs of the money centers, savors strongly of notorious monarchial methods of the past. The king needed the money more than the people did, so he thought ; therefore, he took it. There is a good strong sentence that has been coming down the centuries, and will go on for future generations to consider; it reads like this: "Render therefore unto Caesar the things which be Caesar *s. ' ' The railroads are entitled to a reasonable return. Less than that is unjust to the railroads. More than that is unjust to the public. During the year 1914, as all people know, there was a world-wide business depression. In the United States the grain crops of the preceding fall (being in the fiscal year 1914) fell off 900,000,000 bushels. RECAPITULATION 281 In the exhibits offered, it is shown that in 1913 the net revenues of the railroads in Western Territory as a whole, above all operating expenses, amounted to $420,- 000,000, being the largest, with only one exception — 1910 — since the first track was laid west of the Mississippi River. The average net revenue of these railroads, during the past five years averaged $400,000,000 per year. This was greater than during any five-year period, prior to 1913, in their whole history. This record shows that the percentage return of net corporate income on capital stock outstanding in 1913, was more than double what it was sixteen years ago, and five times greater than it was twenty-five years ago. On the first day of these hearings, we announced that we expected to prove these railroads have been building many additions and betterments, which they were charg- ing to operating expenses. In other words, after paying a return on their investment, we have been building their properties for them, and then are asked to pay a return, not only on their investment, but also on our investment — on what we build for them. This is fundamentally un- sound, and unjust. At that time, we did not realize how easily those facts would be proved. These claims were substantiated by the testimony of the railroad officials, themselves, before it became time for us to offer our evidence. President Felton, of the Great Western, frankly ad- mitted on direct evidence, that practically one-half the cost of additions and betterments could be charged to operating expenses, and that very large sums were so charged during the past four years. President Bush, of the Missouri Pacific, admitted that large portions of the cost of rebuilding his road during recent years had been paid out of operating revenues, and charged to expenses. 282 RECAPITULATION Mr. Wettling, a witness for all the railroads, made a sim- ilar admission, but was unable to state how much of that had been so charged. This testimony was supplemented by the evidence of Mr. Chambers, a witness on behalf of the State Commis- sions, who, from a personal examination of the books of the carriers, demonstrated that over $13,000,000 had been expended in raising the standard of the property of one company. This witness did not take into account large sums expended for labor in connection with additions and betterments, which can be charged to operating expenses ; he did not take into account rails, ties, ballast, tunnels and maintenance of roadway and track, all of which would have added large sums to the amount he demonstrated had been expended in the manner described. The mag- nitude of the total sums involved may be grasped when it is noted that Mr. Wettling 's exhibit shows that over $700,000,000 have been expended in additions and better- ments by these western railroads during the past seven years. It is safe to say that the cost of additions and betterments, amounting to several hundred million dol- lars, has been charged to operating expenses by these western railroads during recent years. So long as this practice is permitted to continue, it is going to be ex- ceedingly difficult to determine just what are the net earnings of our railroads. When prosperity is at its very highest, the railroads can show the lowest net earnings, by simply building a larger amount of improvements and extensions, and charging large portions of this to operating expenses, thereby automatically reducing their net income. We have been passing through a period of new construction of that character, for which proper allowance must be made. We are perfectly willing to pay the people these gen- tlemen represent, an adequate return for their invest- RECAPITULATION 283 ment, such adequate return to include a reasonable sur- plus for tiding them over lean years; but we are abso- lutely unwilling to build their properties for them and then pay a return on what we build. There is no justice in that. The American people will not permanently sub- mit to any arbitrary action which works a substantial wrong on the public. The use of the so-called property investment, which is simply a book value, and which includes the value of that kind of property, built out of surplus, as a justification for an advance in freight rates, is fundamentally wrong. Such a policy has been condemned, in the past, by two unanimous decisions of this Commission. Such a policy has been repudiated by some of the leading railroad of- ficials of the country, while on the witness stand under oath, before this tribunal. If there were any emergency or crisis in the railroad business, it might demand a temporary advance in rates until the Commission has completed its appraisal of American railroads. These western railroads have not even attempted to claim any emergency or crisis in their business, as did the eastern carriers. They acted wisely and fairly in this, for there is no such emergency. They have been steadily improving financially, and physically, during recent years. The attractiveness of stock is purely a relative matter. There is no answer to the argument that the larger sur- plus, or the larger dividend, will make a more attractive stock; and, in turn, there is no limit to that argument. The practical question comes in here : Are these securities attractive, compared with those of companies in other pursuits ? What does the ordinary business yield ? These are the important questions. If you find, in fact, that these railroad companies have been able to maintain their properties as they ought to be maintained, and that rail- way credit, and railway securities, are as sound and at- 284 RECAPITULATION tractive as those of other public service and industrial companies, then there is no reason for still larger returns in the shape of dividends or surplus. Attention has been called to the fact that 4% bonds can no longer be marketed at par, as they were years ago. It comes with poor grace to charge the public 6%, and then complain because you cannot get your money at 4%. An advance in freight rates will not make 4% bonds sell at par. Professor Roscoe Pound, of Harvard, tells the following instance, that is applicable to this argument : A sarcastic conveyancer, during the fever for legislative reform in England, proposed this law: "Be it enacted that during the month of April of each year the King 's loyal subjects shall be at liberty to, and are hereby enabled to go forth without umbrellas upon any and all public streets, roads and highways, without getting wet. ' ' Whether rates are advanced or not, whether the Com- mission or Congress attempts to legislate that prices on bonds shall not decline, will have no more practical effect on the bond prices than the law proposed by the English conveyancer would have had on the weather conditions during the month of April. The market prices on 4 or 4 1 /2% bonds are not peculiar to the railroad industry. The general financial situation and extraordinary production of gold, are the controlling factors in that situation, and this Commission, as we said in 1910, cannot affect that situation. There is nothing to indicate that railway credit, or railway profits, differ materially from the financial situ- ation of other industries generally, except that the condi- tion of these railroads, as a whole, has been proved to be superior. There are ups and downs in all business. The railroads must take the bitter, with the sweet. We find the general trend of their net revenues and of their credit, over a series of years, to be distinctly upward. RECAPITULATION 285 There has been a marvelous development and growth in the property, and revenue, of Western railroads during the past five years, surpassing all prior years, and sur- passing all other countries. More than one-third of the railroad mileage of the world has been constructed by American railway com- panies with private capital. Certainly these securities must be attractive to investors. The Northwestern group of railroads has increased its property investment, during the past five years, more than $700,000,000. The Northwestern and South- western groups of railroads, named in the Commission's suspension order in this case, have, together, increased their property during the past five years more than one billion dollars. The Western railroads as a whole are able to pay their operating expenses including taxes, and to properly main- tain their properties. There is no claim of any need for money for those purposes. These carriers are not asking for more money to meet the interest on their outstanding indebtedness. While a few have failed, the same is true in all lines of industry. As a whole, they are able to meet their obligations. While there is a slight advance in in- terest charges on new money over fifteen years ago, old bonds have been, and are being, retired ; so that the aver- age interest payment on all outstanding indebtedness is less today, than in former years. The carriers are not demanding more money for the purpose of paying dividends. While the average interest rate has declined, the average dividend rate has increased. The dividends paid by these Western railroads last year amounted to $140,967,725. The rate of dividends paid by the Western railroads, including both the Northwestern and Southwestern groups, last year, was 73% greater than in 1900, and 121% greater than in 1890. The average 286 RECAPITULATION dividend rate during recent years has been greater than ever before in the history of these companies. The total annual cash return to the owners of these railroads, in interest and dividends, during the past five years, has been in amount, and in rate, greater than dur- ing any other five-year period in their history, as far back as official records are available. The carriers ask for more money that they may have a surplus with which they can build additions and improve- ments, needed and demanded by the public. The total accumulated surplus earnings of those West- ern railroads named in the suspension order of the Com- mission, on the 30th day of June last year, amounted to $457,800,000, a part of which was in property that has been acquired, and is in railroad service; but that is not true of all of it, for they had cash on hand and invest- ments in outside securities. They paid dividends last year, amounting to $140,900,000. They had cash on hand amounting to $125,000,000. The book value of securities held in their treasuries, laid aside for future use, and unpledged, aggregated $190,000,000. We submit that the legitimate requirements of a sur- plus are here provided for. If they desire to build per- manent revenue producing improvements, they must do it with their own money; they must not expect us to do it for them. It has been proved that the depression in the past year was not due to freight or passenger rates, and was not peculiar to the railroad industry, but applied to business generally throughout the world. It has been proven, incontestably, that the credit of these western railway companies is better than that of representative companies in any other line of business in the United States. It has been proven, incontestably, that these companies RECAPITULATION 287 have been able to maintain their properties, during recent years, at a higher standard than ever before in their his- tory; and they have also set aside large sums of money out of earnings, for betterments, improvements and out- side investments. Tersely stated, the issues in this case center around the one question : Who shall pay for additions and better- ments to railroad property? The public interests demand better service, safer transportation, and improved facili- ties; but it also demands that the railroads themselves shall build these improvements, and the public will then pay a reasonable return on their value. We want these betterments; but justice demands that we shall not pay for their construction, and then pay an annual return to the railroads on what we build. We here adopt the language of a tribunal that ranks high in the American scheme of government : These roads need more money, it is said, but they fail to show that their credit is not good, that they have been unable to secure money at current rates, or that they cannot make needed improvements and ex- tensions because of a lack of faith in their solvency and the stability of their securities. To increase the rate of addition to surplus for the reasons which the carriers have advanced would seem to be a work of supererogation. Respectfully submitted, MINNESOTA RAILROAD & WAREHOUSE COMMISSION, By IRA B. MILLS, CHAS. E. ELMQUIST, O. P. B. JACOBSON, Commissioners. A. J. EDGERTON, Assistant Attorney-General. NEBRASKA STATE RAILWAY COMMISSION, By H. T. CLARKE, JR., THOMAS L. HALL, H. G. TAYLOR, Commissioners. WILLIS E. REED, Attorney-General. KANSAS PUBLIC UTILITIES COMMISSION, By JOSEPH L. BRISTOW, C. P. FOLEY, JOHN M. KINKEL, Commissioners. A. E. HELM, Commerce Counsel. SOUTH DAKOTA RAILROAD COMMISSIONERS, By J. J. MURPHY, P. W. DOUGHERTY, W. G. SMITH, Commissioners. OLIVER E. SWEET, Counsel. NORTH DAKOTA BOARD OF RAILROAD COMMISSIONERS By W. H. STUTSMAN, O. P. N. ANDERSON, W. H. MANN, Commissioners. IOWA BOARD OF RAILROAD COMMISSIONERS, By CLIFFORD THORNE, J. H. WILSON JNO. A. GUIHER, Commissioners. J. H. HENDERSON, Commerce Counsel. OKLAHOMA CORPORATION COMMISSION, By J. E. LOVE, GEO. A. HENSHAW, W. D. HUMPHREY, Commissioners. RAILROAD COMMISSION OF LOUISIANA, By SHELBY TAYLOR, B. A. BRIDGES, JOHN T. MICHEL, Commissioners. W. M. BARROW, Assistant Attorney-General. ARIZONA CORPORATION COMMISSION, By F. A. JONES, W. P. GEARY, A. W. COLE, Commissioners. RAILROAD COMMISSION OF ARKANSAS, By J. SAM ROWLAND, wm. f. Mcknight, thos. e. wood, Commissioners. PUBLIC UTILITIES COMMISSION, OP THE STATE OP COLORADO, By S. S. KENDALL, GEO. T. BRADLEY, M. H. AYLESWORTH, Commissioners. PUBLIC UTILITIES COMMISSION OP IDAHO, By A. P. RAMSTEDT, JOHN W. GRAHAM, A. L. PREEHAFER, Commissioners. RAILROAD COMMISSION OP MONTANA, By J. H. HALL, E. A. MORLEY, j. e. Mccormick, Commissioners. RAILROAD COMMISSION OP NEVADA, By H. P. BARTINE, J. F. SHAUGHNESSY, W. H. SIMMONS, Commissioners. STATE CORPORATION COMMISSION OF NEW MEXICO, By MATTHEW S. GROVES, HUGH H. WILLIAMS, OSCAR L. OWEN, Commissioners. TRAFFIC SERVICE BUREAU OF UTAH, By ROSS W. BEASON. Commissioner. Dated at Des Moines, Iowa, June 9, 1915.